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What changed in Chicago Atlantic Real Estate Finance, Inc.'s 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Chicago Atlantic Real Estate Finance, Inc.'s 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+451 added−439 removedSource: 10-K (2025-03-12) vs 10-K (2024-03-12)

Top changes in Chicago Atlantic Real Estate Finance, Inc.'s 2024 10-K

451 paragraphs added · 439 removed · 331 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

65 edited+26 added−18 removed199 unchanged
Biggest changeSee “ Risk Factors — We will not own real estate as long as it is used in cannabis-related operations due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us .” Loan Investment (1) Location Property Type Principal Balance as of December 31, 2023 Implied Real Estate Collateral for REIT (2) Our Real Estate Collateral Coverage as of December 31, 2023 (4) 1 Senior Real Estate Corporate Loan Multi-State Retail/Industrial $ 29,910,000 $ 5,514,857 0.2 x 2 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 38,810,119 56,962,428 1.5 x 3 Senior Real Estate Corporate Loan 3 Multi-State Retail/Industrial 20,657,606 19,356,702 0.9 x 4 Senior Real Estate Corporate Loan Arizona Industrial 15,396,370 23,900,000 1.6 x 5 Senior Real Estate Corporate Loan 3 Massachusetts Retail/Industrial 3,194,180 900,000 0.3 x 6 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 4,264,421 15,850,000 3.7 x 7 Senior Real Estate Corporate Loan 3 Illinois, Arizona Retail/Industrial 20,184,005 41,675,040 2.1 x 8 Senior Real Estate Corporate Loan West Virginia Retail/Industrial 11,706,059 14,255,000 1.2 x 9 Senior Real Estate Corporate Loan 3 Pennsylvania Retail/Industrial 16,402,488 17,000,000 1.0 x 11 Senior Real Estate Corporate Loan 3 Maryland Industrial 33,310,259 30,400,000 0.9 x 12 Senior Real Estate Corporate Loan 3 Multi-State Retail/Industrial 8,710,222 2,049,733 0.2 x 13 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 13,392,094 42,064,044 3.1 x 14 Senior Loan Various None 5,253,125 — 0.0 x 16 Senior Loan Florida None 4,437,500 — 0.0 x 17 Senior Real Estate Corporate Loan 3 Florida Retail/Industrial 15,000,000 32,840,000 2.2 x 18 Senior Real Estate Corporate Loan 3 Ohio Retail/Industrial 17,155,637 40,080,000 2.3 x 19 Senior Real Estate Corporate Loan 3 Florida Retail/Industrial 20,080,084 27,700,000 1.4 x 20 Senior Real Estate Corporate Loan 3 Missouri Retail/Industrial 17,691,575 27,400,000 1.5 x 21 Senior Real Estate Corporate Loan 3 Illinois Retail/Industrial 5,353,186 9,770,000 1.8 x 23 Senior Real Estate Corporate Loan 3 Arizona Retail/Industrial 1,860,000 3,887,500 2.1 x 24 Senior Real Estate Corporate Loan 3 Oregon Retail/Industrial 820,000 3,600,000 4.4 x 25 Senior Delayed Draw Term Loan New York Retail 22,611,938 33,631,119 1.5 x 26 Senior Real Estate Corporate Loan Connecticut Industrial 5,450,000 7,699,497 1.4 x 27 Senior Real Estate Corporate Loan Nebraska Industrial 13,061,667 52,853,593 4.0 x 28 Senior Real Estate Corporate Loan Ohio Retail 2,466,705 2,000,000 0.8 x 29 Senior Real Estate Corporate Loan Illinois Retail 1,066,065 1,400,000 1.3 x 30 Senior Real Estate Corporate Loan Missouri, Arizona Retail/Industrial 7,500,000 9,217,500 1.2 x $ 355,745,305 $ 522,007,013 1.5 x (1) Senior Real Estate Corporate Loans and Senior Delayed Draw Term Loans are structured as loans to owner operators secured by real estate or loans to property owners that are leased to a third party tenant.
Biggest changeSee “ Risk Factors — We will not own real estate as long as it is used in cannabis-related operations due to current statutory prohibitions and exchange listing standards, which may delay or limit our remedies in the event that any of our borrowers default under the terms of their mortgage loans with us .” Loan Loan Type (1) Location Property Type Principal Balance as of December 31, 2024 Implied Real Estate Collateral for REIT (2) Our Real Estate Collateral Coverage as of December 31, 2024 (4) 1 Senior Real Estate Corporate Loan Multi-State Retail $ 19,324,557 $ 743,479 0.04 x 2 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 27,110,506 55,702,829 2.05 x 3 Senior Real Estate Corporate Loan 3 Multi-State Industrial 21,248,176 19,356,702 0.91 x 4 Senior Real Estate Corporate Loan Arizona Industrial 6,626,809 9,290,473 1.40 x 5 Senior Real Estate Corporate Loan 3 Massachusetts Retail 2,564,180 900,000 0.35 x 6 Senior Real Estate Corporate Loan 3 Michigan Retail/Industrial 4,958,123 15,850,000 3.20 x 7 Senior Real Estate Corporate Loan Illinois, Arizona Industrial 24,293,793 24,251,753 1.00 x 8 Senior Real Estate Corporate Loan West Virginia Retail/Industrial 8,491,943 14,255,000 1.68 x 9 Senior Real Estate Corporate Loan 3 Pennsylvania Industrial 16,402,488 17,000,000 1.04 x 12 Senior Real Estate Corporate Loan 3 Multi-State Retail 11,159,358 2,261,635 0.20 x 16 Senior Loan Florida None 6,557,500 - 0.00 x 18 Senior Real Estate Corporate Loan 3 Ohio Retail/Industrial 45,024,611 41,020,000 0.91 x 19 Senior Real Estate Corporate Loan Florida Industrial 18,892,211 17,105,553 0.91 x 20 Senior Real Estate Corporate Loan Missouri Retail/Industrial 22,243,402 23,128,946 1.04 x 21 Senior Real Estate Corporate Loan Illinois Retail/Industrial 6,583,891 8,597,586 1.31 x 23 Senior Real Estate Corporate Loan 3 Arizona Retail/Industrial 1,620,000 1,502,132 0.93 x 24 Senior Real Estate Corporate Loan 3 Oregon Retail/Industrial 580,000 2,560,000 4.41 x 25 Senior Real Estate Corporate Loan New York Retail 25,093,595 31,812,317 1.27 x 27 Senior Real Estate Corporate Loan Nebraska Industrial 17,400,000 48,027,551 2.76 x 28 Senior Real Estate Corporate Loan Ohio Retail 2,466,705 2,900,000 1.18 x 29 Senior Real Estate Corporate Loan Illinois Retail 1,943,217 4,400,000 2.26 x 30 Senior Delayed Draw Term Loan Missouri, Arizona Retail/Industrial 19,000,000 6,464,130 0.34 x 31 Senior Loan California, Illinois None 6,680,000 - 0.00 x 32 Senior Real Estate Corporate Loan Nevada Retail/Industrial 6,000,000 2,340,000 0.39 x 33 Senior Real Estate Corporate Loan Minnesota Retail 1,116,000 1,720,000 1.54 x 34 Senior Real Estate Corporate Loan Arizona Industrial 10,000,000 14,019,527 1.40 x 35 Senior Real Estate Corporate Loan California Industrial 24,256,045 26,600,000 1.10 x 36 Senior Real Estate Corporate Loan Illinois Industrial 25,000,000 49,700,000 1.99 x 37 Senior Delayed Draw Term Loan 3 Multi-State Industrial 20,019,444 10,584,755 0.53 x 38 Senior Secured Revolver Multi-State Retail/Industrial 2,065,000 3,050,000 1.48 x $ 404,721,554 $ 455,144,368 1.1 x (1) Senior Real Estate Corporate Loans, Senior Delayed Draw Term Loans and Senior Secured Revolvers are structured as loans to owner operators secured by real estate or loans to property owners that are leased to a third party tenant.
However, no assurances can be 1 given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income and distribution tests described under “— U.S. Federal Income Tax Considerations — Taxation”, which in turn depend, in part, on our operating results.
However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on us continuing to satisfy numerous asset, income 1 and distribution tests described under “— U.S. Federal Income Tax Considerations — Taxation”, which in turn depend, in part, on our operating results.
Our current portfolio is comprised primarily of senior loans to state-licensed operators in the cannabis industry, secured by real estate, equipment, receivables, licenses or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers.
Our current portfolio is comprised primarily of senior loans to state-licensed operators in the cannabis industry, secured by real estate, equipment, receivables, licenses or other assets of the borrowers to the extent permitted by applicable laws and regulations governing such borrowers.
On June 30, 2023, CAL entered into a Fourth Amended and Restated Loan and Security Agreement (the “Fourth Amendment and Restatement”). The Fourth Amendment and Restatement increased the loan commitment from $92.5 million to $100.0 million. No other material terms of the Revolving Loan were modified as a result of the execution of the Fourth Amendment and Restatement.
No other material terms of the Revolving Loan were modified as a result of the execution of the Amendment. On June 30, 2023, CAL entered into a Fourth Amended and Restated Loan and Security Agreement (the “Fourth Amendment and Restatement”). The Fourth Amendment and Restatement increased the loan commitment from $92.5 million to $100.0 million.
We believe that we have qualified as a REIT and that our method of operation will enable us to continue to qualify as a REIT.
We believe that we have qualified as a REIT and that our method of operation will enable us to continue to qualify as a REIT.
However, structuring a mezzanine loan to meet the requirements of the safe harbor may 15 not always be practical. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans might not be properly treated as qualifying loans for REIT purposes.
However, structuring a mezzanine loan to meet the requirements of the safe harbor may not 15 always be practical. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans might not be properly treated as qualifying loans for REIT purposes.
Such fee shall be payable upon termination of our Management Agreement in the event that (i) we decline to renew our Management Agreement, without cause, upon 90 days’ prior written notice and the affirmative vote of at least a majority of our independent directors that there has been unsatisfactory performance by our Manager that is materially detrimental to us taken as a whole, or (ii) our Management Agreement is terminated by our Manager (effective upon 60 days’ prior written notice) based upon our default in the performance or observance of any material term, condition or covenant contained in our Management Agreement and such default continuing for a period of 30 days after written notice thereof specifying such default and requesting that the same be remedied in such 30-day period.
Such fee shall be payable upon termination of our Management Agreement in the event that (i) we decline to renew our Management Agreement, without cause, upon 90 days’ prior written notice and the affirmative vote of at least a majority of our independent directors that there has been unsatisfactory performance by our Manager that is materially detrimental to us taken as a whole, or (ii) our Management Agreement is terminated by our Manager (effective upon 60 days’ prior written notice) based upon our default in the performance or observance of any material term, condition or covenant contained in our Management Agreement and such default continuing for a period of 30 days after written notice thereof specifying such default and requesting that the same be remedied in such 30-day period. termination in cash.
For more information, see “ Risk Factors — Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability .” We may diversify our portfolio by also lending or investing in properties that are not related to the cannabis industry if they provide return characteristics consistent with our investment objective.
For more information, see “ Risk Factors — Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability .” 5 We may diversify our portfolio by also lending or investing in properties that are not related to the cannabis industry if they provide return characteristics consistent with our investment objective.
(C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The SEC generally requires that, for the exception provided by Section 3(c)(5) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on 18 and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets).
(C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The SEC generally requires that, for the exception provided by Section 3(c)(5) to be available, at least 55% of an entity’s assets be comprised of mortgages and other liens on and interests in real estate, also known as “qualifying interests,” and at least another 25% of the entity’s assets must be comprised of additional qualifying interests or real estate-type interests (with no more than 20% of the entity’s assets comprised of miscellaneous assets).
This guidance essentially characterized use of federal law enforcement resources to prosecute those complying with state laws allowing the use, manufacture and distribution of cannabis as an inefficient use of such federal resources where states have enacted laws legalizing cannabis in some form and have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of cannabis.
This guidance essentially characterized use of federal law enforcement resources to prosecute those complying with state laws allowing the use, manufacture and distribution of cannabis as an inefficient use of such federal resources where states have enacted laws legalizing cannabis in some form and have also implemented strong and effective regulatory and enforcement systems to control the cultivation, 11 processing, distribution, sale and possession of cannabis.
From time to time, we may invest in mezzanine loans, preferred equity or other forms of joint venture equity. 5 We draw upon our Manager’s expertise in sourcing, underwriting, structuring and funding capabilities to implement our growth strategy. We believe that our current growth strategy provides significant potential opportunities to our stockholders for attractive risk-adjusted returns over time.
From time to time, we may invest in mezzanine loans, preferred equity or other forms of joint venture equity. We draw upon our Manager’s expertise in sourcing, underwriting, structuring and funding capabilities to implement our growth strategy. We believe that our current growth strategy provides significant potential opportunities to our stockholders for attractive risk-adjusted returns over time.
The Sessions Memo instructs federal prosecutors to enforce the laws enacted by Congress and to follow well-established principles 11 that govern all federal prosecutors when deciding whether to pursue prosecutions related to cannabis activities. As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute actors compliant with their state laws.
The Sessions Memo instructs federal prosecutors to enforce the laws enacted by Congress and to follow well-established principles that govern all federal prosecutors when deciding whether to pursue prosecutions related to cannabis activities. As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute actors compliant with their state laws.
We believe we qualify for the exemption under this section and our current intention is to continue to focus on originating and investing in loans collateralized by real estate so that at least 55% of our assets are “qualifying interests” and no more than 20% of our assets are miscellaneous assets.
We believe we qualify for the exemption under this section and our current intention is to continue to focus on originating and 18 investing in loans collateralized by real estate so that at least 55% of our assets are “qualifying interests” and no more than 20% of our assets are miscellaneous assets.
As a result, applicable state and local laws and regulations vary 12 widely, including, but not limited to, product testing, the level of enforcement by state and local authorities on non-licensed cannabis operators, state and local taxation of regulated cannabis products, local municipality bans on operations and operator licensing processes and renewals.
As a result, applicable state and local laws and regulations vary widely, including, but not limited to, product testing, the level of enforcement by state and local authorities on non-licensed cannabis operators, state and local taxation of regulated cannabis products, local municipality bans on operations and operator licensing processes and renewals.
We intend to make timely distributions sufficient to satisfy all annual distribution requirements. 17 From time to time, we may experience timing differences between (1) the actual receipt of income and actual payment of deductible expenses and (2) the inclusion of that income and deduction of those expenses in arriving at our taxable income.
We intend to make timely distributions sufficient to satisfy all annual distribution requirements. From time to time, we may experience timing differences between (1) the actual receipt of income and actual payment of deductible expenses and (2) the inclusion of that income and deduction of those expenses in arriving at our taxable income.
We believe by carefully assessing specific challenges and because we possess the ability to understand and quantify the risks involved, we are able to effectively capitalize on market inefficiencies. We believe these types of assets provide an attractive, and often overlooked, investment opportunity. Nimble Execution.
We believe by carefully assessing specific challenges and 4 because we possess the ability to understand and quantify the risks involved, we are able to effectively capitalize on market inefficiencies. We believe these types of assets provide an attractive, and often overlooked, investment opportunity. Nimble Execution.
Further, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds our allocable share of cash attributable to that sale. Additionally, we may incur cash expenditures that are not currently deductible for tax purposes.
Further, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property that exceeds our allocable share of 17 cash attributable to that sale. Additionally, we may incur cash expenditures that are not currently deductible for tax purposes.
These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system via electronic means, including on the SEC’s homepage, which can be found at www.sec.gov . 19
These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system via electronic means, including on the SEC’s homepage, which can be found at www.sec.gov .
In addition, the Audit Committee of our Board may assist our Board in its oversight of the determination of the fair value of assets, as applicable, that are not publicly traded or for which current market values are not readily available by evaluating various subjective and objective factors, including input provided by an independent valuation firm that we currently retain to provide input on the valuation of such assets.
In addition, the Audit Committee of our Board may assist our Board in its oversight of the determination of loss reserves and/or the fair value of assets, as applicable, that are not publicly traded or for which current market values are not readily available by evaluating various subjective and objective factors, including input provided by an independent valuation firm that we currently retain to provide input on the valuation of such assets.
We also invest in companies or properties that are not related to the cannabis industry that provide return characteristics consistent with our investment objective.
We may also invest in companies or properties that are not related to the cannabis industry that provide return characteristics consistent with our investment objective.
Seasonality Our business has not been, and we do not expect it to become subject to, material seasonal fluctuations. 13 U.S. Federal Income Tax Considerations We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable period ended December 31, 2021.
Seasonality 13 Our business has not been, and we do not expect it to become subject to, material seasonal fluctuations. U.S. Federal Income Tax Considerations We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2021.
See “ Risk Factors — Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. ” The table below represents the real estate collateral securing our loans as of December 31, 2023.
See “ Risk Factors — Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability. ” The table below represents the real estate collateral securing our loans as of December 31, 2024.
(6) Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features.
(5) Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features.
Other investment vehicles managed by our Manager or affiliates of our Manager may co-invest with us or hold positions in a loan where we have also invested, including by means of allocating commitments, participating in loans or other means of syndicating loans.
Other investment vehicles managed by our Manager or affiliates of our Manager may co-invest with us or hold positions in a loan that we have also invested in, including by means of allocating commitments, participating in loans or other means of syndicating loans.
Some of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several of our competitors, including other REITs, have recently raised, or are expected to raise, significant amounts of capital and may have investment objectives that overlap with our investment objective, which may create additional competition for lending and other investment opportunities.
Some of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several of our competitors, including other REITs, have raised, or may raise, significant amounts of capital and may have investment objectives that overlap with our investment objective, which may create additional competition for lending and other investment opportunities.
Termination Fee Equal to three times the sum of (i) the annualized average quarterly Base Management Fee and (ii) the annualized average quarterly Incentive Compensation, in each case, earned by our Manager during the 24-month period immediately preceding the most recently completed fiscal quarter prior to the date of termination.
Termination Fee Equal to three times the sum of (i) the annualized average quarterly Base Management Fee and (ii) the annualized average quarterly Incentive Compensation, in each case, earned by our Manager during the 24-month period immediately preceding the most recently Upon specified 3 completed fiscal quarter prior to the date of termination.
Our current portfolio as of December 31, 2023 has a weighted average maturity of 2.1 years with significant prepayment protections, whereas we believe that certain competitors with typical equity REIT land ownership models often have long-term leases averaging 10 years or more.
Our current portfolio as of December 31, 2024 has a weighted average maturity of 2.2 years with significant prepayment protections, whereas we believe that certain competitors with typical equity REIT land ownership models often have long-term leases averaging 10 years or more.
Our Manager’s Investment Committee, which is comprised of John Mazarakis, Anthony Cappell, Dr. Andreas Bodmeier, and Peter Sack, advises and consults with our Manager and its investment professionals with respect to our investment strategy, portfolio construction, financing, investment guidelines, and risk management, and approves all of our investments.
Our Manager’s Investment Committee, which is comprised of John Mazarakis, Anthony Cappell, Andreas Bodmeier, David Kite and Peter Sack, advises and consults with our Manager and its investment professionals with respect to our investment strategy, portfolio construction, financing, investment guidelines, and risk management, and approves all of our investments.
Collectively, the investment professionals have originated, underwritten, structured, documented, managed, or syndicated over $8.0 billion in credit and real estate transactions, which includes loans to cannabis operators, loans to companies engaged in activities unrelated to cannabis, as well as commercial real estate loans.
Collectively, the investment professionals have originated, underwritten, structured, documented, managed, or syndicated over $8.0 billion in credit and real estate transactions during their careers, which includes loans to cannabis operators, loans to companies engaged in activities unrelated to cannabis, as well as commercial real estate loans.
Attorney General Garland has indicated that he does not intend to prosecute state-legal marijuana programs, and testified to Congress in March of 2023 that the DOJ intended to release a new policy memorandum that would be similar in content to the Cole Memorandum.
Attorney General Garland indicated that he did not intend to prosecute state-legal marijuana programs, and testified to Congress in March of 2023 that the DOJ intended to release a new policy memorandum that would be similar in content to the Cole Memorandum.
Quarterly in arrears. Expense Reimbursement We pay all of our costs and expenses and reimburse our Manager or its affiliates for expenses of our Manager and its affiliates paid or incurred on our behalf, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
Expense Reimbursement We pay all of our costs and expenses and reimburse our Manager or its affiliates for expenses of our Manager and its affiliates paid or incurred on our behalf, excepting only those expenses that are specifically the responsibility of our Manager pursuant to our Management Agreement.
Chicago Atlantic Group, LP (our “Sponsor”) and its affiliates have originated and closed more than 70 loans totaling approximately $1.8 billion to companies operating in the cannabis industry, making their first loan to a cannabis operator in April 2019.
Chicago Atlantic Group, LP (our “Sponsor”) and its affiliates have originated and closed more than 90 loans totaling approximately $2.1 billion to companies operating in the cannabis industry, making their first loan to a cannabis operator in April 2019.
Manager’s Investment Committee The Manager’s Investment Committee overseeing the loan portfolio and the loan origination process for us is focused on managing our credit risk through a comprehensive investment review process. As part of the investment process, the Manager’s Investment Committee must approve each loan before commitment papers are issued.
Manager’s Investment Committee The Manager’s Investment Committee overseeing the loan portfolio and the loan origination process for us is focused on managing our credit risk through a comprehensive investment review process. As part of the investment process, the Manager’s Investment Committee must approve each loan before term sheets or other commitment papers are issued.
We impose strict loan covenants and seek personal or corporate guarantees for additional protection. As of December 31, 2023, 27.1% of the loans held in our portfolio based on outstanding principal, are backed by personal or corporate guarantees. We aim to maintain a diversified portfolio across jurisdictions and across verticals, including cultivators, processors, dispensaries, and other businesses ancillary thereto.
We impose strict loan covenants and seek personal or corporate guarantees for additional protection. As of December 31, 2024, 36.5% of the loans held in our portfolio based on outstanding principal, are backed by personal or corporate guarantees. We aim to maintain a diversified portfolio across jurisdictions and across verticals, including cultivators, processors, dispensaries, and other businesses ancillary thereto.
As of December 31, 2023, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 19.4% and was secured by real estate and, with respect to certain of our loans, substantially all assets in the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
As of December 31, 2024, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 17.2% and was secured by real estate and, with respect to certain of our loans, substantially all assets in the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1 for the applicable trailing twelve month period, and (3) maintaining a leverage ratio less than 1.50 to 1.
Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1.
As of December 31, 2023, we had an outstanding balance of $66.0 million and remaining undrawn availability of $34.0 million under the Revolving Loan. Additionally, as of December 31, 2023, $165.7 million in principal of our loans held for investment are pledged as collateral in the borrowing base of the Revolving Loan.
As of December 31, 2024, we had an outstanding balance of $55.0 million and remaining undrawn availability of $55.0 million under the Revolving Loan. Additionally, as of December 31, 2024, $131.0 million in principal of our loans held for investment are pledged as collateral in the borrowing base of the Revolving Loan.
No other material terms of the Revolving Loan were modified as a result of the execution of the Second Amendment and Restatement. The Company incurred debt issuance costs of $177,261 related to the Second Amendment and Restatement, which were capitalized and are subsequently amortized through maturity.
No other material terms of the Revolving Loan were modified as a result of the execution of the Fourth Amendment and Restatement. The Company incurred debt issuance costs of $0.1 million related to the Fourth Amendment and Restatement, which were capitalized and are subsequently being amortized through maturity.
(4) The total real estate collateral coverage ratio represents a weighted average real estate collateral coverage ratio. Further, the value may also be determined using the income approach, based on market lease rates for comparable properties, whether dispensaries or cultivation facilities. It indicates the value to a third-party owner that leases to a dispensary or cultivation facility.
Further, the value may also be determined using the income approach, based on market lease rates for comparable properties, whether dispensaries or cultivation facilities. It indicates the value to a third-party owner that leases to a dispensary or cultivation facility.
No other material terms of the Revolving Loan were modified as a result of the execution of the Third Amendment and Restatement. The Company incurred debt issuance costs of $323,779 related to the Third Amendment and Restatement, which were capitalized and are subsequently amortized through maturity.
No other material terms of the Revolving Loan were modified as a result of the execution of the Fifth Amendment and Restatement. The Company incurred debt issuance costs of approximately $0.1 million related to the Fifth Amendment and Restatement, which were capitalized and will subsequently be amortized through maturity.
As of December 31, 2023, the yield to maturity (“YTM”) IRR on our loans is 19.4% on a weighted average basis and ranges from 14.7% to 36.3% through coupons, OID, unused fees, exit fees, and other yield-enhancing fees, as applicable.
As of December 31, 2024, the yield to maturity (“YTM”) IRR on our loans is 17.2% on a weighted average basis and ranges from 11.0% to 31.2% through coupons, OID, unused fees, exit fees, and other yield-enhancing fees, as applicable.
As of December 31, 2023 and 2022, unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of $366,592 and $805,596, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.
As of December 31, 2024, the Company is in compliance with all financial covenants with respect to the Revolving Loan. 10 As of December 31, 2024 and 2023, unamortized debt issuance costs related to the Revolving Loan, including all amendments and amendments and restatements thereto, as applicable, of $305,075 and $366,592, respectively, are recorded in other receivables and assets, net on the consolidated balance sheets.
Upon specified termination in cash. 3 Summary Compensation Table Year ended December 31, 2023 Year ended December 31, 2022 Base Management Fees $ 4,046,398 $ 2,783,274 Incentive Fees 4,736,436 3,778,813 Expense Reimbursement 4,799,210 3,137,861 Total $ 13,582,044 $ 9,699,948 Our Competitive Strengths We expect demand for financing in the cannabis market to continue to rise due to recent and future state legalization of cannabis for recreational and medical use, while federal prohibition on cannabis use and commercialization hampers certain commercial and financial activities.
Summary Compensation Table Year ended December 31, 2024 Year ended December 31, 2023 Base Management Fees $ 4,138,401 $ 4,046,398 Incentive Fees 3,923,495 4,736,436 Expense Reimbursement 4,821,373 4,799,210 Total $ 12,883,269 $ 13,582,044 Our Competitive Strengths We expect demand for financing in the cannabis market to continue to rise due to recent and future state legalization of cannabis for recreational and medical use, while federal prohibition on cannabis use and commercialization hampers certain commercial and financial activities.
Loan #9 is included on the consolidated balance sheet as a loan held for investment – related party (Note 7) Collateral Overview Our loans to cannabis operators are secured by various types of assets of our borrowers, including real property and certain personal property, including licenses, equipment, receivables, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
The remaining balance presented is held for investment as of December 31, 2024. Collateral Overview Our loans to cannabis operators are secured by various types of assets of our borrowers, including real property and certain personal property, including licenses, equipment, receivables, and other assets to the extent permitted by applicable laws and the regulations governing our borrowers.
Our Manager will regularly evaluate loans and intends to retain an independent third-party valuation firm to provide input on the valuation of unquoted assets, which our Manager considers along with various other subjective and objective factors when making any such evaluation.
Our Manager will regularly evaluate loans and retains independent third-party valuation firms to provide input on the valuation of unquoted assets, which our Manager considers along with various other subjective and objective factors when making any such evaluation, including the determination of reserves for credit losses, as applicable.
Any change in the federal government’s enforcement posture with respect to state-licensed cannabis operators, including the enforcement postures of individual federal prosecutors in judicial districts where our borrowers operate, would result in our inability to execute our business plan, and we would likely suffer significant losses with respect to our investments, which would adversely affect the trading price of our securities.
Any change in the federal government’s enforcement posture with respect to state-licensed cannabis operators, including the enforcement postures of individual federal prosecutors in judicial districts where our borrowers operate, would result in our inability to execute our business plan, and we would likely suffer significant losses with respect to our investments, which would adversely affect the trading price of our securities. 12 State Laws Applicable to the Cannabis Industry In most states that have legalized cannabis in some form, the growing, processing and/or dispensing of cannabis generally requires that the operator obtain one or more licenses in accordance with applicable state requirements.
Local governments in some cases also impose rules and regulations on the manner of operating cannabis businesses.
In addition, many states regulate various aspects of the growing, processing and/or dispensing of cannabis. Local governments in some cases also impose rules and regulations on the manner of operating cannabis businesses.
Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers.
Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers. The below table summarizes our portfolio of loans held for investment by rate type as of December 31, 2024 and 2023.
This model also allows our borrowers to retain control of their real estate assets, which is important to their businesses and allows for more flexibility regarding their capital structure. 4 Our Growth Strategy Objective Our primary investment objective is to provide attractive, risk-adjusted returns for stockholders over time, primarily through consistent current income dividends and other distributions and secondarily through capital appreciation.
Our Growth Strategy Objective Our primary investment objective is to provide attractive, risk-adjusted returns for stockholders over time, primarily through consistent current income dividends and other distributions and secondarily through capital appreciation.
Our senior management team is provided by our Manager and includes John Mazarakis, our Executive Chairman, Anthony Cappell, our Co-Chief Executive Officer, Peter Sack, our Co-Chief Executive Officer, and Dr. Andreas Bodmeier, our President and Chief Investment Officer. Our Manager is supported by additional investment professionals with significant expertise in executing our investment strategy and accounting, operational, and legal professionals.
Our senior management team is provided by our Manager and includes John Mazarakis, our Executive Chairman, Anthony Cappell, our Co-Chief Executive Officer, Peter Sack, our Co-Chief Executive Officer, Dr. Andreas Bodmeier, our President and Chief Investment Officer, David Kite, our Chief Operating Officer and Phil Silverman, our Chief Financial Officer.
The Fifth Amendment and Restatement, extended the contractual maturity date of the Revolving Loan until June 30, 2026, and expanded the existing accordion feature to permit aggregate loan commitments of up to $150.0 million. No other material terms of the Revolving Loan were modified as a result of the execution of the Fifth Amendment and Restatement.
On February 28, 2024, CAL entered into a Fifth Amended and Restated Loan and Security Agreement (the “Fifth Amendment and Restatement”). The Fifth Amendment and Restatement extended the contractual maturity date of the Revolving Loan until June 30, 2026, and expanded the existing accordion feature to permit aggregate loan commitments of up to $150.0 million.
The First Amendment and Restatement also extended the maturity date from February 12, 2023 to the earlier of (i) December 16, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to the terms of the Revolving Loan agreement.
The Revolving Loan had an aggregate commitment of $92.5 million, and a maturity date of the earlier of (i) December 16, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to the terms of the Revolving Loan agreement. On February 27, 2023, CAL entered into an amendment to the Third Amendment and Restatement (the “Amendment”).
Actual maturities may differ from contractual maturities stated herein and certain borrowers may have the right to prepay with or without a contractual prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.
(2) Certain loans are subject to contractual extension options and may be subject to performance based on other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein and certain borrowers may have the right to prepay with or without a contractual prepayment penalty.
We consider cannabis operators to be established if they are state-licensed and are deemed to be operational and in good standing by the applicable state regulator.
As of December 31, 2024, our portfolio is comprised primarily of first mortgage loans to established multi-state or single-state cannabis operators or property owners. We consider cannabis operators to be established if they are state-licensed and are deemed to be operational and in good standing by the applicable state regulator.
Government Regulation Our operations are subject to regulation, supervision, and licensing under various United States, state, provincial, and local statutes, ordinances and regulations.
As of December 31, 2024, the Company is in compliance with all financial covenants with respect to the Unsecured Notes. Government Regulation Our operations are subject to regulation, supervision, and licensing under various United States, state, provincial, and local statutes, ordinances and regulations.
The Company incurred debt issuance costs of approximately $0.1 million related to the Fifth Amendment and Restatement, which were capitalized and will subsequently be amortized through maturity. The Revolving Loan provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
The Revolving Loan provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
(7) This Loan is subject to a prime rate floor of 3.25% 7 (8) This Loan is subject to a prime rate floor of 4.00% (9) This Loan is subject to a prime rate floor of 4.75% (10) This Loan is subject to a prime rate floor of 5.50% (11) This Loan is subject to a prime rate floor of 6.25% (12) This Loan is subject to a prime rate floor of 7.00% (13) This Loan is subject to a prime rate floor of 7.50% (14) This Loan is subject to a prime rate floor of 8.00% (15) This Loan is subject to a prime rate floor of 8.25% (16) This Loan is subject to a prime rate floor of 8.50% (17) This Loan is subject to a prime rate cap of 5.85% (18) The aggregate loan commitment to Loan #3 includes a $15.9 million initial commitment which has a base interest rate of 13.625% cash, 2.75% PIK and a second commitment of $4.2 million which has an interest rate of 15.00% cash, 2.00% PIK.
(6) This Loan is subject to a prime rate floor of 3.25% (7) This Loan is subject to a prime rate floor of 5.50% (8) This Loan is subject to a prime rate floor of 6.25% 7 (9) This Loan is subject to a prime rate floor of 7.00% (10) This Loan is subject to a prime rate floor of 7.50% (11) This Loan is subject to a prime rate floor of 7.75% (12) This Loan is subject to a prime rate floor of 8.00% (13) This Loan is subject to a prime rate floor of 8.50% (14) The borrower of Loan #33 is an affiliate of the borrower of Loan #3, a related party.
For properties used for cannabis cultivation, the appraisals use similar sized warehouses in their conclusion of the subject’s “as-is” value without licenses to cultivate cannabis. However, the appraised value is assumed to be realized from a purchase by another state-licensed cannabis operator or a third-party purchaser that would lease the subject property to a state-licensed cannabis operator.
For properties used for cannabis cultivation, the appraisals use similar sized warehouses in their conclusion of the subject’s “as-is” value without licenses to cultivate cannabis.
The regulatory requirements related to real property used in cannabis-related operations may cause significant delays or difficulties in transferring a property to another cannabis operator, as the state regulator may require inspection and approval of the new tenant/user. 9 (3) Certain affiliated co-lenders subordinated their interest in the real estate collateral to the Company, thus increasing the collateral coverage for the applicable loan.
However, the appraised value is assumed to be realized from a purchase by another state-licensed cannabis operator or a third-party purchaser that would lease the subject property to a state-licensed cannabis operator. 9 The regulatory requirements related to real property used in cannabis-related operations may cause significant delays or difficulties in transferring a property to another cannabis operator, as the state regulator may require inspection and approval of the new tenant/user.
Revolving Credit Facility In May 2021, in connection with the Company’s acquisition of its wholly-owned financing subsidiary, Chicago Atlantic Lincoln, LLC (“CAL”), the Company was assigned a secured revolving credit facility (the “Revolving Loan”).
Debt Financing Revolving Loan In May 2021, in connection with the Company’s acquisition of its wholly-owned financing subsidiary, CAL, the Company was assigned a secured revolving credit facility (the “Revolving Loan”). As of December 31, 2022, the Revolving Loan had an interest rate equal to the greater of (1) the Prime Rate plus the applicable margin and (2) 3.25%.
(5) P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.
P&I loans may include interest only periods for a portion of the loan term. The frequency of loan payments may be monthly or quarterly as required by the respective credit agreement governing such loan.
The statistics presented reflect the weighted average of the terms under all advances for the total aggregate loan commitment. (19) As of December 1, 2023, this loan was placed on non-accrual status. In March 2024, we entered into an amendment to Loan #6, which extended the maturity date to April 15, 2024.
The statistics presented reflect the weighted average of the rate terms under both tranches for the total aggregate loan principal, however only the maturity date for the first tranche has been presented in the table above. (16) As of May 1, 2023, Loan #9 was placed on non-accrual status and remains on non-accrual as of December 31, 2024.
Our Manager will use its commercially reasonable efforts to perform its duties under our Management Agreement. The initial term of our Management Agreement is for three years and shall continue until May 1, 2024. After the initial term, our Management Agreement shall automatically renew every year for an additional one-year period, unless we or our Manager elect not to renew.
Our Manager will use its commercially reasonable efforts to perform its duties under our Management Agreement. The Management Agreement had a three-year initial term that expired on April 30, 2024.
Our Portfolio Overview As of December 31, 2023, loans to 27 different borrowers comprise our portfolio, totaling approximately $355.7 million in total principal amount, with approximately $7.5 million in committed future fundings to such borrowers.
Our Portfolio Overview As of December 31, 2024, loans to 30 different borrowers comprise our portfolio, totaling approximately $410.2 million in total principal amount, of which $404.7 million is designated as held for investment and carried at amortized cost and $5.5 million is reported at fair value on the consolidated balance sheets.
(3) Total Commitment excludes future amounts to be advanced at sole discretion of the lender and reflects receipt of scheduled amortization payments as of December 31, 2023. (4) "P" = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; "PIK" = paid-in-kind interest; subtotal represents weighted average interest rate.
The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications. (3) "P" = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; "PIK" = paid-in-kind interest. (4) P&I = principal and interest. I/O = interest only.
Removed
As of December 31, 2023, our portfolio is comprised primarily of first mortgage loans to established multi-state or single-state cannabis operators or property owners. In addition, we own approximately $0.8 million, at fair value, of publicly-traded corporate bonds issued by a multi-state cannabis operator.
Added
Our Manager is supported by additional investment professionals with significant expertise in executing our investment strategy and accounting, operational, compliance and legal professionals.
Removed
As of December 31, 2023, approximately 80.5% of our portfolio was comprised of floating rate loans that pay interest at the Prime Rate plus an applicable margin and were subject to a Prime Rate floor, and 19.5% of our portfolio was comprised of fixed rate loans.
Added
After the initial term, the management agreement is automatically renewed for one-year periods unless the Company or the Manager elects not to renew in accordance with the terms of the Management Agreement. On April 30, 2024, the Management Agreement was automatically renewed.
Removed
All of our loans had prepayment penalties at origination and 54% of our loans, based on outstanding principal, are still protected by prepayment penalties as of December 31, 2023. 6 The table below summarizes our loan portfolio as of December 31, 2023.
Added
Core Earnings is defined as the Company's net income (loss) for the applicable period, computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) the Incentive Compensation, (iii) depreciation and amortization, (iv) any unrealized gains or losses or other non-cash items that are included in net income for the applicable reporting period, regardless of whether such items are included in other comprehensive income or loss, or in net income and (v) one-time events pursuant to changes in GAAP and certain non-cash charges.
Removed
Loan (1) Location(s) Initial Funding Date (1) Maturity Date (2) Total Commitment (3) Principal Balance Original Issue Discount Carrying Value Percentage of Our Loan Portfolio Future Fundings Interest Rate (4) Periodic Payment (5) YTM IRR (6) 1 Various 10/27/2022 10/30/2026 $ 30,000,000 $ 29,910,000 $ (635,656 ) $ 29,274,344 8.3 % - P+6.5% Cash (11) I/O 17.3% 2 Michigan 1/13/2022 12/31/2024 35,891,667 38,810,119 (81,073 ) 38,729,046 11.0 % - P+6.65% Cash, 4.25% PIK (17) P&I 18.0% 3 (18) Various 3/25/2021 11/29/2024 20,105,628 20,657,606 (175,697 ) 20,481,909 5.8 % - P+10.38% Cash, 2.75% PIK (7) P&I 23.5% 4 Arizona 4/19/2021 2/14/2023 14,240,129 15,396,370 - 15,396,370 4.4 % - P+11.75% PIK (15) I/O 25.9% 5 Massachusetts 4/19/2021 4/30/2025 3,500,000 3,194,180 - 3,194,180 0.9 % - P+12.25% Cash (7) P&I 22.8% 6 (19) Michigan 8/20/2021 2/20/2024 6,000,000 4,264,421 (535 ) 4,263,886 1.2 % - P+9% Cash (7) P&I 20.8% 7 Illinois, Arizona 8/24/2021 6/30/2025 25,000,000 20,184,005 (128,551 ) 20,055,454 5.7 % - P+6% Cash, 2% PIK (12) P&I 19.5% 8 West Virginia 9/1/2021 9/1/2024 9,500,000 11,706,059 (42,473 ) 11,663,586 3.3 % - P+9.25% Cash, 2% PIK (8) P&I 25.1% 9 (20) Pennsylvania 9/3/2021 6/30/2024 15,000,000 16,402,488 - 16,402,488 4.6 % - P+10.75% Cash, 3% PIK (7) P&I 16.2% 11 Maryland 9/30/2021 9/30/2024 32,000,000 33,310,259 (267,990 ) 33,042,269 9.3 % - P+8.75% Cash, 2% PIK (7) I/O 22.0% 12 Various 11/8/2021 10/31/2024 20,000,000 8,710,222 (52,406 ) 8,657,816 2.4 % - P+7% Cash (13) P&I 19.5% 13 Michigan 11/22/2021 11/1/2024 13,600,000 13,392,094 (59,248 ) 13,332,846 3.8 % - P+6% Cash, 1.5% PIK (12) I/O 19.5% 14 Various 12/27/2021 12/27/2026 5,000,000 5,253,125 - 5,253,125 1.5 % - P+12.25% Cash, 2.5% PIK (9) P&I 22.8% 16 Florida 12/30/2021 12/31/2024 13,000,000 4,437,500 (19,058 ) 4,418,442 1.2 % - P+9.25% Cash (7) I/O 36.3% 17 Florida 1/18/2022 1/31/2025 15,000,000 15,000,000 (136,667 ) 14,863,333 4.2 % - P+4.75% Cash (11) P&I 14.8% 18 Ohio 2/3/2022 2/28/2025 11,662,050 17,155,637 (92,206 ) 17,063,431 4.8 % - P+1.75% Cash, 5% PIK (12) P&I 20.4% 19 Florida 3/11/2022 8/29/2025 20,000,000 20,080,084 (48,217 ) 20,031,867 5.7 % - 11% Cash, 3% PIK P&I 15.5% 20 Missouri 5/9/2022 5/30/2025 17,000,000 17,691,575 (78,532 ) 17,613,043 5.0 % - 11% Cash, 2% PIK P&I 14.7% 21 Illinois 7/1/2022 7/29/2026 9,000,000 5,353,186 (56,877 ) 5,296,309 1.5 % - P+8.5% Cash, 3% PIK (9) P&I 25.6% 23 Arizona 3/27/2023 3/31/2026 2,000,000 1,860,000 (37,319 ) 1,822,681 0.5 % - P+7.5% Cash (14) P&I 19.4% 24 Oregon 3/31/2023 9/27/2026 1,000,000 820,000 - 820,000 0.2 % - P+10.5% Cash (10) P&I 21.7% 25 New York 8/1/2023 6/29/2036 23,309,588 22,611,938 - 22,611,938 6.4 % - 15% Cash P&I 16.7% 26 Connecticut 8/31/2023 2/27/2026 5,450,000 5,450,000 (118,004 ) 5,331,996 1.5 % - 14% Cash P&I 19.1% 27 Nebraska 8/15/2023 6/30/2027 13,061,667 13,061,667 - 13,061,667 3.7 % - P+8.75% Cash P&I 19.0% 28 Ohio 9/13/2023 3/13/2025 2,466,705 2,466,705 - 2,466,705 0.7 % - 15% Cash P&I 17.4% 29 Illinois 10/11/2023 10/9/2026 1,062,564 1,066,065 - 1,066,065 0.3 % - 11.4% Cash, 1.5% PIK P&I 15.9% 30 Missouri, Arizona 12/20/2023 12/31/2026 15,000,000 7,500,000 (74,186 ) 7,425,814 2.1 % 7,500,000 P+7.75% Cash (16) I/O 18.4% Subtotal $ 378,849,998 $ 355,745,305 $ (2,104,695 ) $ 353,640,610 100 % $ 7,500,000 Wtd Average 19.4% (1) All loans originated prior to April 1, 2021 were purchased from affiliated entities at fair value plus accrued interest on or subsequent to April 1, 2021.
Added
Core Earnings, as defined in the Management Agreement, is consistent with the definition of Distributable Earnings as described in "Non-GAAP Measures and Key Financial Measures and Indicators " within Management’s Discussion and Analysis of Financial Condition and Results of Operations. . Quarterly in arrears.
Removed
Loan numbering in the table above is maintained from origination for purposes of comparability and may not be sequential due to maturities, payoffs, or refinancings. (2) Certain loans are subject to contractual extension options and may be subject to performance based on other conditions as stipulated in the loan agreement.
Added
This model also allows our borrowers to retain control of their real estate assets, which is important to their businesses and allows for more flexibility regarding their capital structure.
Removed
In connection with this amendment, Loan #6 was restored to accrual status (Note 14). (20) As of May 1, 2023, Loan #9 was placed on non-accrual status and continues to be on non-accrual as of December 31, 2023.
Added
The Audit Committee of our Board is also responsible for the approval and pricing as it relates to all related party transactions, including those relating to loan portfolio transactions.
Removed
The Revolving Loan had an original aggregate borrowing base of up to $10,000,000 and bore interest, payable in cash in arrears, at a per annum rate equal to the greater of (x) Prime Rate plus 1.00% and (y) 4.75%.
Added
Additionally, the Company has approximately $20.9 million in unfunded commitments to existing borrowers, of which $14.9 million and $6.0 million relate to loans held for investment and loans at fair value, respectively.
Removed
The Company incurred debt issuance costs of $100,000 related to the origination of the Revolving Loan, which were capitalized and are subsequently being amortized through maturity. The maturity date of the Revolving Loan was the earlier of (i) February 12, 2023 and (ii) the date on which the Revolving Loan is terminated pursuant to terms in the Revolving Loan Agreement.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

147 edited+39 added−25 removed461 unchanged
Biggest changeRisks Related to Sources of Financing Our Business • Our growth depends on external sources of capital, which may not be available on favorable terms or at all. • Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. 20 Risks Related to Our Organization and Structure • There are various conflicts of interest in our relationship with our Manager, including conflicts created by our Manager’s compensation arrangements with us, which could result in decisions that are not in the best interests of our stockholders. • Maintenance of our exemption from registration under the Investment Company Act may impose significant limits on our operations.
Biggest changeRisks Related to Our Organization and Structure 20 • There are various conflicts of interest in our relationship with our Manager, including conflicts created by our Manager’s compensation arrangements with us, which could result in decisions that are not in the best interests of our stockholders. • Maintenance of our exemption from registration under the Investment Company Act may impose significant limits on our operations.
Moreover, we strategically benefit from the cannabis industry’s currently constrained access to U.S. capital markets and if such access is broadened, including if the New York Stock Exchange (the “NYSE”) and/or the Nasdaq Stock Market were to permit the 21 listing of plant-touching cannabis companies in the U.S., the demand among U.S. cannabis companies for private equity investments and debt financings, including our target loans, may materially decrease and could result in our competing with financial institutions that we otherwise would not.
Moreover, we strategically benefit from the cannabis industry’s currently constrained access to U.S. capital markets and if such access is broadened, 21 including if the New York Stock Exchange (the “NYSE”) and/or the Nasdaq Stock Market were to permit the listing of plant-touching cannabis companies in the U.S., the demand among U.S. cannabis companies for private equity investments and debt financings, including our target loans, may materially decrease and could result in our competing with financial institutions that we otherwise would not.
If a significant loan to one or more companies fails to perform as expected, such a failure could have a material adverse effect on our business, financial condition and operating results, and the magnitude of such effect could be more significant than if we had further diversified our portfolio.
If a significant loan to one or more companies fails to perform as expected, such failure could have a material adverse effect on our business, financial condition and operating results, and the magnitude of such effect could be more significant than if we had further diversified our portfolio.
Moreover, individuals and entities may violate federal law if they aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them, and violating the federal cannabis laws is a predicate for certain other crimes under the anti-money laundering laws or The Racketeer Influenced and Corrupt Organizations Act.
Moreover, individuals and entities may violate federal law if they aid and abet another in violating these federal controlled substance laws, or conspire with another to violate them, and violating the federal cannabis laws is a predicate for certain other crimes under the anti-money laundering laws and The Racketeer Influenced and Corrupt Organizations Act.
Pursuant to the terms of our Management Agreement, our Manager receives Base Management Fees that are calculated and payable quarterly in arrears in cash, in an amount equal to 0.375% (1.50% on an annualized basis) of our Equity, subject to certain adjustments, including any agency fees relating to our loans, but excluding the Incentive Compensation and any diligence fees paid to and earned by our Manager and paid by third parties in connection with our Manager’s due diligence of potential loans.
Pursuant to the terms of our Management Agreement, our Manager receives Base Management Fees that are calculated and payable quarterly in arrears in cash, in an amount equal to 0.375% (1.50% on an annualized basis) of our Equity, subject to certain adjustments, including any agency fees relating to our loans, but excluding the Incentive Compensation and any diligence fees paid to and earned by our Manager and paid by third parties in 50 connection with our Manager’s due diligence of potential loans.
Such joint venture investments may involve risks not otherwise present when we originate or acquire investments without partners, including the following: • we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest; • joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms; • any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner; • we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions; • a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals; • a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT and our exclusion or exemption from registration under the Investment Company Act; • a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture’s liabilities; • our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership; • disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or • we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to maintain our qualification as a REIT or our exclusion or exemption from registration under the Investment Company Act, even though we do not control the joint venture.
Such joint venture investments may involve risks not otherwise present when we originate or acquire investments without partners, including the following: • we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest; • joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms; • any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner; • we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions; • a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals; 47 • a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT and our exclusion or exemption from registration under the Investment Company Act; • a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture’s liabilities; • our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership; • disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or • we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to maintain our qualification as a REIT or our exclusion or exemption from registration under the Investment Company Act, even though we do not control the joint venture.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including, but not limited to, the risks that: • our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt we incur or we may fail to comply with all of the other covenants contained in such debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (iii) the loss of some or all of our assets to foreclosure or sale; 40 • we may be unable to borrow additional funds as needed or on favorable terms, or at all; • to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense; • our default under any loan with cross-default provisions could result in a default on other indebtedness; • incurring debt may increase our vulnerability to adverse economic and industry conditions with no assurance that loan yields will increase with higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on the debt we may incur, thereby reducing funds available for operations, future business opportunities, stockholder distributions, including distributions currently contemplated or necessary to satisfy the requirements for REIT qualification, or other purposes; and • we are not able to refinance debt that matures prior to the loan it was used to finance on favorable terms, or at all.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including, but not limited to, the risks that: • our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt we incur or we may fail to comply with all of the other covenants contained in such debt, which is likely to result in (i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, and/or (iii) the loss of some or all of our assets to foreclosure or sale; • we may be unable to borrow additional funds as needed or on favorable terms, or at all; • to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense; • our default under any loan with cross-default provisions could result in a default on other indebtedness; • incurring debt may increase our vulnerability to adverse economic and industry conditions with no assurance that loan yields will increase with higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on the debt we may incur, thereby reducing funds available for operations, future business opportunities, stockholder distributions, including distributions currently contemplated or necessary to satisfy the requirements for REIT qualification, or other purposes; and • we are not able to refinance debt that matures prior to the loan it was used to finance on favorable terms, or at all.
Our Charter and Bylaws include, among others, provisions that: • authorize our Board, without stockholder approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; • authorize “blank check” preferred stock, which could be issued by our Board without stockholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights senior to our common stock; • specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of stockholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our stockholders; • establish advance notice procedures for stockholder proposals to be brought before an annual or special meeting of our stockholders, including proposed nominations of individuals for election to our Board; • provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; and • provide our Board the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws.
Our Charter and Bylaws include, among others, provisions that: 43 • authorize our Board, without stockholder approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of our preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine; • authorize “blank check” preferred stock, which could be issued by our Board without stockholder approval, subject to certain specified limitations, and may contain voting, liquidation, dividend and other rights senior to our common stock; • specify that only our Board, the chairman of our Board, our chief executive officer or president or, upon the written request of stockholders entitled to cast not less than a majority of the votes entitled to be cast, our secretary can call special meetings of our stockholders; • establish advance notice procedures for stockholder proposals to be brought before an annual or special meeting of our stockholders, including proposed nominations of individuals for election to our Board; • provide that a majority of directors then in office, even though less than a quorum, may fill any vacancy on our Board, whether resulting from an increase in the number of directors or otherwise; and • provide our Board the exclusive power to adopt, alter or repeal any provision of our Bylaws and to make new Bylaws.
Net operating income of an income-producing property can be affected by, among other things: • tenant mix and tenant bankruptcies; • success of tenant businesses; • property management decisions, including with respect to capital improvements, particularly in older building structures; • property location and condition; • competition from other properties offering the same or similar services; • changes in laws that increase operating expenses or limit rents that may be charged; • any liabilities relating to environmental matters at the property; • changes in national, regional or local economic conditions and/or specific industry segments; 25 • declines in national, regional or local real estate values; • declines in national, regional or local rental or occupancy rates; • changes in interest rates and in the state of the debt and equity capital markets, including diminished availability or lack of debt financing for commercial real estate; • changes in real estate tax rates and other operating expenses; • changes in governmental rules, regulations and fiscal policies, including environmental legislation; • acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and • adverse changes in zoning laws.
Net operating income of an income-producing property can be affected by, among other things: • tenant mix and tenant bankruptcies; • success of tenant businesses; • property management decisions, including with respect to capital improvements, particularly in older building structures; • property location and condition; • competition from other properties offering the same or similar services; • changes in laws that increase operating expenses or limit rents that may be charged; • any liabilities relating to environmental matters at the property; • changes in national, regional or local economic conditions and/or specific industry segments; • declines in national, regional or local real estate values; • declines in national, regional or local rental or occupancy rates; • changes in interest rates and in the state of the debt and equity capital markets, including diminished availability or lack of debt financing for commercial real estate; • changes in real estate tax rates and other operating expenses; • changes in governmental rules, regulations and fiscal policies, including environmental legislation; • acts of God, terrorism, social unrest and civil disturbances, which may decrease the availability of or increase the cost of insurance or result in uninsured losses; and • adverse changes in zoning laws.
To the extent that we invest in non-U.S. real estate-related assets, we may be subject to certain risks associated with international investment generally, including, among others: • currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency to another; • less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity; • the burdens of complying with international regulatory requirements and prohibitions that differ between jurisdictions; • changes in laws or clarifications to existing laws that could impact our tax treaty positions, which could adversely impact the returns on our investments; • a less developed legal or regulatory environment, differences in the legal and regulatory environment or enhanced legal and regulatory compliance; • political hostility to investments by foreign investors; • higher inflation rates; • higher transaction costs; • difficulty enforcing contractual obligations; • fewer investor protections; • potentially adverse tax consequences; or • other economic and political risks.
To the extent that we invest in non-U.S. real estate-related assets, we may be subject to certain risks associated with international investment generally, including, among others: • currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency to another; • less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity; • the burdens of complying with international regulatory requirements and prohibitions that differ between jurisdictions; • changes in laws or clarifications to existing laws that could impact our tax treaty positions, which could adversely impact the returns on our investments; 28 • a less developed legal or regulatory environment, differences in the legal and regulatory environment or enhanced legal and regulatory compliance; • political hostility to investments by foreign investors; • higher inflation rates; • higher transaction costs; • difficulty enforcing contractual obligations; • fewer investor protections; • potentially adverse tax consequences; or • other economic and political risks.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include: • our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; • changes in governmental policies, regulations or laws; • loss of a major funding source or inability to obtain new favorable funding sources in the future; • equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; • actual, anticipated or perceived accounting or internal control problems; • publication of research reports about us, the real estate industry or the cannabis industry; • our value of the properties securing our loans; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we may incur in the future; • additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; • speculation in the press or investment community about us or other similar companies; • our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; • increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our stockholders) and which could cause the cost of our interest expenses on our debt to increase; • failure to qualify or maintain our qualification as a REIT or exclusion from the Investment Company Act; 53 • price and volume fluctuations in the stock market generally; and • general market and economic conditions, including the state of the credit and capital markets.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include: • our actual or projected operating results, financial condition, cash flows and liquidity or changes in business strategy or prospects; • changes in governmental policies, regulations or laws; • loss of a major funding source or inability to obtain new favorable funding sources in the future; • equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur; 55 • actual, anticipated or perceived accounting or internal control problems; • publication of research reports about us, the real estate industry or the cannabis industry; • our value of the properties securing our loans; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we may incur in the future; • additions to or departures of the executive officers or key personnel supporting or assisting us from our Manager or its affiliates, including our Manager’s investment professionals; • speculation in the press or investment community about us or other similar companies; • our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts; • increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock (if we have begun to make distributions to our stockholders) and which could cause the cost of our interest expenses on our debt to increase; • failure to qualify or maintain our qualification as a REIT or exclusion from the Investment Company Act; • price and volume fluctuations in the stock market generally; and • general market and economic conditions, including the state of the credit and capital markets.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because: • we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; • we could be subject to increased state and local taxes; and 50 • unless we are entitled to relief under statutory provisions, we would not be able to re-elect to be taxed as a REIT for four taxable years following the year in which we were disqualified.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because: • we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; • we could be subject to increased state and local taxes; and • unless we are entitled to relief under statutory provisions, we would not be able to re-elect to be taxed as a REIT for four taxable years following the year in which we were disqualified.
In addition, burdensome regulations at the state level could slow or stop further development of the medical-use and/or adult-use cannabis industry, such as 35 limiting the medical conditions for which medical-use cannabis can be recommended, restricting the form in which medical-use or adult-use cannabis can be consumed, or imposing significant taxes on the growth, processing and/or retail sales of cannabis, each of which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our borrowers, to operate profitably in those states.
In addition, burdensome regulations at the state level could slow or stop further development of the medical-use and/or adult-use cannabis industry, such as limiting the medical conditions for which medical-use cannabis can be recommended, restricting the form in which medical-use or adult-use cannabis can be consumed, or imposing significant taxes on the growth, processing and/or retail sales of cannabis, each of which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our borrowers, to operate profitably in those states.
In addition, in the event that (1) the owner of the loan participation interest does not have the benefit of a perfected security interest in the lender’s rights to payments from the borrower under the commercial mortgage 26 loan or (2) there are substantial differences between the terms of the commercial mortgage loan and those of the applicable loan participation interest, such loan participation interest could be recharacterized as an unsecured loan to a lender that is the record holder of the loan in such lender’s bankruptcy, and the assets of such lender may not be sufficient to satisfy the terms of such loan participation interest.
In addition, in the event that (1) the owner of the loan participation interest does not have the benefit of a perfected security interest in the lender’s rights to payments from the borrower under the commercial mortgage loan or (2) there are substantial differences between the terms of the commercial mortgage loan and those of the applicable loan participation interest, such loan participation interest could be recharacterized as an unsecured loan to a lender that is the record holder of the loan in such lender’s bankruptcy, and the assets of such lender may not be sufficient to satisfy the terms of such loan participation interest.
Subject to the approval of our Manager, our Board (which must include a majority of our independent directors) may change our investment strategies or guidelines, financing strategies or leverage policies with respect to loans, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in a loan portfolio with a different risk profile than that of our existing portfolio or of a portfolio comprised of our target loans.
Subject to the approval of our Manager, our Board (which must include a majority of our independent directors) may change our investment strategies or guidelines, financing strategies or leverage policies with respect to loans, originations, acquisitions, growth, 32 operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in a loan portfolio with a different risk profile than that of our existing portfolio or of a portfolio comprised of our target loans.
A consequence of this limited number of loans is that the aggregate returns we realize may be significantly adversely affected if a small number of loans perform poorly, if we need to write down the value of any one loan, if a loan is repaid prior to maturity and we are 22 not able to promptly redeploy the proceeds and/or if an issuer is unable to obtain and maintain commercial success.
A consequence of this limited number of loans is that the aggregate returns we realize may be significantly adversely affected if a small number of loans perform poorly, if we need to write down the value of any one loan, if a loan is repaid prior to maturity and we are not able to promptly redeploy the proceeds and/or if an issuer is unable to obtain and maintain commercial success.
Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition. We compete as an alternative financing provider of debt financing to companies in the cannabis industry. Several competitors have recently entered the marketplace, and these competitors may prevent us from making attractive loans on favorable terms.
Competition for the capital that we provide may reduce the return of our loans, which could adversely affect our operating results and financial condition. We compete as an alternative financing provider of debt financing to companies in the cannabis industry. Several competitors have entered the marketplace, and these competitors may prevent us from making attractive loans on favorable terms.
We rely on the exception set forth in Section 3(c)(5) of the Investment Company Act, which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the 44 installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses . . .
We rely on the exception set forth in Section 3(c)(5) of the Investment Company Act, which excludes from the definition of investment company “[a]ny person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses . . .
While our loan agreements and related mortgages provide for foreclosure remedies, receivership remedies and/or other remedies that would allow us to cause the sale or other realization of real property collateral, the regulatory requirements 37 and statutory prohibitions related to real property used in cannabis-related operations may cause significant delays or difficulties in realizing upon the expected value of such real property collateral.
While our loan agreements and related mortgages provide for foreclosure remedies, receivership remedies and/or other remedies that would allow us to cause the sale or other realization of real property collateral, the regulatory requirements and statutory prohibitions related to real property used in cannabis-related operations may cause significant delays or difficulties in realizing upon the expected value of such real property collateral.
If we are unable to invest a sufficient amount of the net proceeds of our initial public offering in qualifying real estate assets within such one-year period, we could fail to satisfy the gross income tests and/or we could be limited to investing all or a 51 portion of any remaining funds in cash.
If we are unable to invest a sufficient amount of the net proceeds of our initial public offering in qualifying real estate assets within such one-year period, we could fail to satisfy the gross income tests and/or we could be limited to investing all or a portion of any remaining funds in cash.
In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
In addition, we will be 53 subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
Any person or entity purchasing or otherwise acquiring any interest in shares of our stock shall be deemed to have notice of and to have consented to the provisions of our Charter and Bylaws described above. 42 Our Board may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.
Any person or entity purchasing or otherwise acquiring any interest in shares of our stock shall be deemed to have notice of and to have consented to the provisions of our Charter and Bylaws described above. Our Board may approve the issuance of stock, including preferred stock, with terms that may discourage a third party from acquiring us.
In such 47 circumstances, the size of the investment opportunity in loans otherwise available to us may be less than it would otherwise have been, and we may participate in such opportunities on different and potentially less favorable economic terms than such other parties if our Manager deems such participation as being otherwise in our best interests.
In such circumstances, the size of the investment opportunity in loans otherwise available to us may be less than it would otherwise have been, and we may participate in such opportunities on different and potentially less favorable economic terms than such other parties if our Manager deems such participation as being otherwise in our best interests.
Any of the foregoing may lead to a decrease in our profitability, and you may experience a lower return on your investment. Increased competition in providing capital may also preclude us from making those loans that would generate attractive returns to us. Our loans’ lack of liquidity may adversely affect our business.
Any of the foregoing may lead to a decrease in our profitability, and you may experience a lower return on your investment. Increased competition in providing capital may also preclude us from making loans that would generate attractive returns to us. Our loans’ lack of liquidity may adversely affect our business.
In certain limited cases (e.g., in connection with a workout, restructuring and/or foreclosing proceedings involving one or more of our investments), the success of our investment strategy with respect thereto will depend, in part, on our ability to effectuate loan modifications and/or restructure and improve the operations of the borrower entities.
In certain limited cases (e.g., in connection with a workout, restructuring and/or foreclosing proceedings involving one or more of our investments), the success of our investment strategy with respect thereto will depend, in part, on our ability to effectuate loan 30 modifications and/or restructure and improve the operations of the borrower entities.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company and/or smaller reporting company, as applicable.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price 57 may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company and/or smaller reporting company, as applicable.
To the extent OID and PIK-interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income. Our investments include original-issue-discount instruments and contractual PIK-interest arrangements.
To the extent OID and PIK-interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income. Certain of our investments include original-issue-discount instruments and contractual PIK-interest arrangements.
Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would violate the CSA.
Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute cannabis assets as such action would 38 violate the CSA.
In addition, while we do not consider our Company to be engaged in 39 the cannabis industry, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we invest in companies involved in the cultivation, manufacturing and sale of cannabis.
In addition, while we do not consider our Company to be engaged in the cannabis industry, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we invest in companies involved in the cultivation, manufacturing and sale of cannabis.
United States regulators have elected to implement substantially all of the Basel III standards and have even implemented rules requiring enhanced supplementary leverage ratio standards, which impose capital requirements more stringent than those of the Basel III standards for the most systematically significant banking organizations in the United States.
United States regulators have elected to implement substantially all of the Basel III standards and have even implemented rules requiring enhanced supplementary leverage ratio standards, which impose capital requirements more stringent than those of the Basel II standards for the most systematically significant banking organizations in the United States.
Decisions made and loans entered into by our Manager may not fully reflect your best interests. 49 Our Manager may change its investment process, or elect not to follow it, without the consent of our stockholders and at any time, which may adversely affect the performance of our portfolio.
Decisions made and loans entered into by our Manager may not fully reflect your best interests. Our Manager may change its investment process, or elect not to follow it, without the consent of our stockholders and at any time, which may adversely affect the performance of our portfolio.
Some statements in the following risk factors constitute forward-looking statements. Risk Factors Summary The following is a summary of the principal risks and uncertainties that could adversely affect our business, cash flows, financial condition and/or results of operations, and these adverse impacts may be material.
Some statements in the following risk factors constitute forward-looking statements. Risk Factors Summary 19 The following is a summary of the principal risks and uncertainties that could adversely affect our business, cash flows, financial condition and/or results of operations, and these adverse impacts may be material.
Risks Related to Sources of Financing Our Business Our growth depends on external sources of capital, which may not be available on favorable terms or at all. We intend to grow by expanding our portfolio of loans, which we intend to finance primarily through newly issued equity or debt.
Risks Related to Sources of Financing Our Business Our growth depends on external sources of capital, which may not be available on favorable terms or at all. 40 We intend to grow by expanding our portfolio of loans, which we intend to finance primarily through newly issued equity or debt.
Prior to the IPO, we were not subject to the public company internal control framework requirements and therefore did not sufficiently design 56 and document our control environment to be in compliance with all required public company standards contemplated by Section 404 that we will eventually be required to meet.
Prior to the IPO, we were not subject to the public company internal control framework requirements and therefore did not sufficiently design and document our control environment to be in compliance with all required public company standards contemplated by Section 404 that we will eventually be required to meet.
Our existing portfolio is, and our future portfolio may be, concentrated in a limited number of loans, which subjects us to an increased risk of significant loss if any asset declines in value or if a particular borrower fails to perform as expected. Our existing portfolio is, and our future loans may be, concentrated in a limited number of loans.
Our existing portfolio is, and our future portfolio may be, concentrated in a limited number of loans, which subjects us to an increased risk of significant loss if any asset declines in value or if a particular borrower fails to perform as expected. 22 Our existing portfolio is, and our future loans may be, concentrated in a limited number of loans.
The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired.
The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of 25 the property is reduced, the borrower’s ability to repay the loan may be impaired.
Results of foreclosure processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with enforcement of our rights, such as claims that challenge the validity or enforceability of our loan or 24 the priority or perfection of our security interests.
Results of foreclosure processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with enforcement of our rights, such as claims that challenge the validity or enforceability of our loan or the priority or perfection of our security interests.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners. 45 We may in the future make investments through joint ventures.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners. We may in the future make investments through joint ventures.
Further, when there are turbulent conditions in the real 46 estate markets or distress in the credit markets, the attention of our Manager’s personnel and our executive officers and the resources of our Manager may also be required by other investment vehicles managed by affiliates of our Manager.
Further, when there are turbulent conditions in the real estate markets or distress in the credit markets, the attention of our Manager’s personnel and our executive officers and the resources of our Manager may also be required by other investment vehicles managed by affiliates of our Manager.
If we participate in a co-investment with an investment vehicle managed by our Manager or an affiliate of our Manager and such vehicle fails to fund a future advance on a loan, we may be required to, or we may elect to, cover such advance and invest additional funds.
If we participate in a co-investment with an investment vehicle managed by our Manager or an affiliate of our Manager 49 and such vehicle fails to fund a future advance on a loan, we may be required to, or we may elect to, cover such advance and invest additional funds.
In certain cases, we may, and may continue to, obtain unsecured guarantees from the parent entities or subsidiaries of our borrowers in addition to the collateral provided by such borrowers and such guarantees may be effectively subordinated to any secured debt of any such entities and/or structurally subordinated to any debt of such subsidiaries.
In certain cases, we may, and may continue to, obtain unsecured guarantees from the parent entities or subsidiaries of our borrowers in addition to the collateral provided by such borrowers and such guarantees may be effectively subordinated to any secured debt of any such entities and/or structurally subordinated to any debt of such 31 subsidiaries.
In addition, certain states have adopted laws or regulations that may, among other requirements, require licensing of lenders and financiers, prescribe disclosures of certain contractual terms, impose limitations on interest rates and other charges, and limit or prohibit certain collection practices and creditor remedies. 33 There is no guarantee that we will be able to obtain, maintain or renew any required licenses or authorizations to conduct our business or that we would not experience significant delays in obtaining these licenses and authorizations.
In addition, certain states have adopted laws or regulations that may, among other requirements, require licensing of lenders and financiers, prescribe disclosures of certain contractual terms, impose limitations on interest rates and other charges, and limit or prohibit certain collection practices and creditor remedies. 34 There is no guarantee that we will be able to obtain, maintain or renew any required licenses or authorizations to conduct our business or that we would not experience significant delays in obtaining these licenses and authorizations.
The providers of bank credit facilities may also require us to maintain a certain 41 amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations.
The providers of bank credit facilities may also require us to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations.
We may in the future invest in loan participation interests in which another lender or lenders share with us the rights, obligations and benefits of a commercial mortgage loan made by an originating lender to a borrower.
We may invest in loan participation interests in which another lender or lenders share with us the rights, obligations and benefits of a commercial mortgage loan made by an originating lender to a borrower.
Beginning with this annual report on Form 10-K for the year ended December 31, 2022, we are required to conduct annual management assessments of the effectiveness of our internal controls over financial reporting.
Beginning with our annual report on Form 10-K for the year ended December 31, 2022, we are required to conduct annual management assessments of the effectiveness of our internal controls over financial reporting.
We believe that our organization and method of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT. However, we cannot assure you that we will qualify as such.
We believe that our organization and method of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT. 52 However, we cannot assure you that we will qualify as such.
Former Attorney General William Barr testified in his confirmation hearing on January 15, 2019, that he would not upset “settled expectations,” “investments,” or other “reliance interest[s]” arising as a result of the Cole Memo, and that he does not intend to use federal resources to enforce federal cannabis laws in states that have legalized cannabis “to the extent people are complying with the state laws.” He stated: “My approach to this would be not to upset settled expectations and the reliance interest that have arisen as a result of the Cole Memorandum and investments have been made and so there has been reliance on it, so I don’t think it’s appropriate to upset those interests.” He also implied that the CSA’s prohibitions of cannabis may be null in states that have legalized cannabis: 34 “[T]he current situation … is almost like a back door nullification of federal law.” Industry observers generally have not interpreted Attorney General Barr’s comments to suggest that the DOJ would proceed with cases against participants who entered the state-legal industry after the Cole Memo had been rescinded.
Former Attorney General William Barr testified in his confirmation hearing on January 15, 2019, that he would not upset “settled expectations,” “investments,” or other “reliance interest[s]” arising as a result of the Cole Memo, and that he did not intend to use federal resources to enforce federal cannabis laws in states that have legalized cannabis “to the extent people are complying with the state laws.” He stated: “My approach to this would be not to upset settled expectations and the reliance interest that have arisen as a result of the Cole Memorandum and investments have been made and so there has been reliance on it, so I don’t think it’s appropriate to upset those 35 interests.” He also implied that the CSA’s prohibitions of cannabis may be null in states that have legalized cannabis: “[T]he current situation … is almost like a back door nullification of federal law.” Industry observers generally have not interpreted Attorney General Barr’s comments to suggest that the DOJ would proceed with cases against participants who entered the state-legal industry after the Cole Memo had been rescinded.
Foreclosing on pledged equity is subject to approval by the applicable state regulator as it would trigger a change of control, which has to be approved by the state regulator, in its discretion.
Foreclosing on pledged equity is subject to approval by the applicable state regulator as it would trigger a change of control, 39 which has to be approved by the state regulator, in its discretion.
At the same time, the interest income we earn on our fixed-rate loans would not change, the duration and weighted average life of our fixed-rate loans would increase and the market value of our fixed-rate loans would decrease.
At the same time, the 42 interest income we earn on our fixed-rate loans would not change, the duration and weighted average life of our fixed-rate loans would increase and the market value of our fixed-rate loans would decrease.
In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of such entity and liquidate its business.
In addition, our contracts would 46 be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of such entity and liquidate its business.
Any of the foregoing 23 could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our stockholders.
Accordingly, we may face greater risks from loan participation interests than if we had made first mortgage loans directly to the owners of real estate collateral. Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value.
Accordingly, we may face greater risks from loan participation interests than if we had made first mortgage loans directly to the owners of real estate collateral. Declines in market prices and liquidity in the capital markets can result in significant net unrealized depreciation of our portfolio, which in turn would reduce the net carrying value of our portfolio.
If any of the risks discussed below occur, our business, prospects, liquidity, funds from operations, internal rate of return, financial condition and results of operations, and our ability to make distributions to our stockholders could be materially and adversely affected, in which case the value of our common stock could decline significantly and you could lose all or part of your investment.
If any of the risks discussed below occur, our business, prospects, liquidity, internal rate of return, financial condition and results of operations, and our ability to make distributions to our stockholders could be materially and adversely affected, in which case the value of our common stock could decline significantly and you could lose all or part of your investment.
Although our intended investment strategy is to construct a portfolio of loans secured with first priority liens on certain assets of our borrowers, we may in the future enter into credit agreements 30 that rank equally with, or are subordinated to, other debt of our borrowers or that otherwise permit our borrowers to incur other debt that ranks equally with, or senior to, our loans under such credit agreements.
Although our intended investment strategy is to construct a portfolio of loans secured with first priority liens on certain assets of our borrowers, we may in the future enter into additional credit agreements that rank equally with, or are subordinated to, other debt of our borrowers or that otherwise permit our borrowers to incur other debt that ranks equally with, or senior to, our loans under such credit agreements.
If any of these or similar events occurs, it may cause borrowers to default on their obligations to us and, thereby, reduce our return from an affected property or investment and reduce or eliminate our ability to pay dividends to stockholders. All of our assets may be subject to recourse.
If any of these or similar events occur, it may cause borrowers to default on their obligations to us and, thereby, reduce our return from an affected property or investment and reduce or eliminate our ability to pay dividends to stockholders. All of our assets may be subject to recourse.
Risks Related to Our Taxation as a REIT • Failure to qualify as a REIT for U.S. federal income tax purposes would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders. • We may incur significant debt, and our governing documents contain no limit on the amount of debt we may incur.
Risks Related to Our Taxation as a REIT • Failure to maintain our qualification as a REIT for U.S. federal income tax purposes would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders. • We may incur significant debt, and our governing documents contain no limit on the amount of debt we may incur.
Changes in general economic conditions will affect the creditworthiness of borrowers and/or the value of underlying real estate collateral relating to our investments and may include economic and/or market fluctuations, changes in environmental, zoning and other laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to tenants, changes in supply and demand of real estate products, fluctuations in real estate fundamentals, energy and supply shortages, various uninsured or uninsurable risks, natural disasters, changes in government regulations (such as rent control), changes in real property tax rates and operating expenses, changes in interest rates, changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, negative developments in the economy and/or real estate values generally and other factors that are beyond our control.
Changes in general economic conditions will affect the creditworthiness of borrowers and/or the value of underlying real estate collateral relating to our investments and may include economic and/or market fluctuations, changes in environmental, zoning and other laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to tenants, changes 29 in supply and demand of real estate products, fluctuations in real estate fundamentals, energy and supply shortages, various uninsured or uninsurable risks, natural disasters, changes in government regulations (such as rent control, zoning restrictions, building code mandates, etc.), changes in real property tax rates and operating expenses, changes in interest rates, changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, negative developments in the economy and/or real estate values generally and other factors that are beyond our control.
The Investment Company Act provides certain protection to investors and imposes certain restrictions on registered investment companies (including, for example, limitations on the ability of registered investment companies to incur leverage), none of which will be applicable to us.
The Investment Company Act provides certain protections to investors and imposes certain restrictions on registered investment companies (including, for example, limitations on the ability of registered investment companies to incur leverage), none of which will be applicable to us.
We expect the principal amount of the loans we originate to increase and that we will need to raise additional equity and/or debt funds to increase our liquidity in the near future.
We expect the principal amount of the loans we originate to increase and that we will need to raise additional equity and/or debt to increase our liquidity in the future.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arkansas, Arizona, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, and West Virginia, and we will be subject to social, political and economic risks of doing business in those states and any other state in which we in the future have lending exposure.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arizona, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New York, Ohio, Oregon, Pennsylvania, Texas and West Virginia, and we will be subject to social, political and economic risks of doing business in those states and any other state in which we in the future have lending exposure.
Depending on market conditions, we could incur substantial realized and/or unrealized losses, which could have a material adverse effect on our business, financial condition or results of operations. The loans and other assets we will obtain may be subject to impairment charges, and we may experience a decline in the fair value of our assets.
Depending on market conditions, we could incur substantial realized and/or unrealized losses, which could have a material adverse effect on our business, financial condition or results of operations. The loans and other assets we obtain may be subject to impairment charges, and we may experience a decline in the net carrying value of our assets.
Since the Sessions Memo was issued over five years ago, however, U.S. Attorneys have not prosecuted state law compliant entities.
Since the Sessions Memo was issued over six years ago, however, U.S. Attorneys have not prosecuted state law compliant entities.
Your investment return in our common stock may be reduced if we are required to register as an investment company under the Investment Company Act. We intend to continue to conduct our operations so that we will be exempt from the provisions of the Investment Company Act pursuant to an exemption contained in 3(c)(5)(C) thereunder.
Your investment return in our common stock may be reduced if we are required to register as an investment company under the Investment Company Act. We have conducted and intend to continue to conduct our operations so that we will be exempt from the provisions of the Investment Company Act pursuant to an exemption contained in Section 3(c)(5)(C) thereunder.
Such events, including trade tensions between the United States and China, other uncertainties regarding actual and potential shifts in U.S. and foreign, trade, economic and other policies with other countries, the Russia-Ukraine war and more recently the Israel-Hamas war and health epidemics and pandemics, could adversely affect our business, financial condition, cash flows and results of operations.
Such events, including trade tensions between the United States and other countries, such as Canada, Mexico, and China, other uncertainties regarding actual and potential shifts in U.S. and foreign trade, economic and other policies with other countries, the Russia-Ukraine war and the Israel-Hamas war and health epidemics and pandemics, could adversely affect our business, financial condition, cash flows and results of operations.
We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all.
We may not have the funds available to repay our debt when due, which would likely result in defaults unless we are able to raise funds from alternative sources, which we may not be able to achieve on favorable terms or at all.
While one of the loans in our portfolio has defaulted as of the date of this annual report on Form 10-K, there can be no assurance that we will not experience other defaults in the future. If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
While one of the loans in our portfolio is in payment default as of the date of this annual report on Form 10-K, there can be no assurance that we will not experience other defaults in the future. 24 If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.
The internal policies of our Manager and its affiliates, which may be amended without our consent, are intended to enable us to share equitably with any other investment vehicles that are managed by our Manager or affiliates of our Manager.
The internal policies of our Manager and its affiliates, which may be amended without our consent, are intended to enable us to participate equitably in investment opportunities with any other investment vehicles that are managed by our Manager or affiliates of our Manager.
Furthermore, our Manager may decline to renew the Management Agreement with 90 days’ written notice prior to the expiration of the renewal term. If the Management Agreement is terminated and we are unable to find a suitable replacement for our Manager, we may not be able to execute its investment strategy.
Our Manager may terminate the Management Agreement with 90 days’ written notice prior to the expiration of the renewal term. If the Management Agreement is terminated and we are unable to find a suitable replacement for our Manager, we may not be able to execute our investment strategy.
If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset which could have an adverse effect on our results of operations in the period in which the impairment charge is recorded.
If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset which could have an adverse effect on our results of operations in the period in which the impairment charge is recorded. Substantially all of the debt that we invest in is unrated.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arkansas, Arizona, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey, New York, Ohio, Oregon, Pennsylvania, and West Virginia.
Our existing portfolio contains loans to companies with operations that are geographically concentrated in Arizona, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New York, Ohio, Oregon, Pennsylvania, Texas and West Virginia.
In determining “intended use,” the FDA has traditionally looked beyond a product’s label to statements made on websites, on social media, or orally by the company’s representatives. While the FDA has not yet enforced against the cannabis industry, it has sent numerous warning letters to sellers of CBD products making health claims.
In determining “intended use,” the FDA has traditionally looked beyond a product’s label to statements made on websites, on social media, or orally by the company’s representatives. While the FDA has not yet enforced against the cannabis industry, it has sent numerous warning letters to sellers of CBD, Delta-8, and intoxicating hemp products.
Volatility in the capital markets can adversely affect our loan valuations. Decreases in the market values or fair values of our loans are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value (and, as a result our asset coverage calculation) by increasing net unrealized depreciation in our portfolio.
Volatility in the capital markets can adversely affect our loan valuations. Decreases in the market values or fair values of our loans are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce the net carrying value of our portfolio by increasing net unrealized depreciation in our portfolio.
To the extent such investment vehicles seek to acquire the same target assets as us, subject to the internal policies of our Manager and its affiliates described above, the scope of opportunities otherwise available to us may be adversely affected and/or reduced.
Such loans may raise potential conflicts of interest between us and such other investment vehicles. To the extent such investment vehicles seek to acquire the same target assets as us, subject to the internal policies of our Manager and its affiliates described above, the scope of opportunities otherwise available to us may be adversely affected and/or reduced.
Such factors include economic pressures related to high inflation, rising interest rates, economic weakness or recession, as well as geopolitical and public health events such as the Russia-Ukraine and Israel-Hamas wars, pandemics, and workforce expectations.
Such factors include economic pressures related to high inflation, interest rate uncertainty, economic weakness or recession, as well as geopolitical and public health events such as the Russia-Ukraine and Israel-Hamas wars, pandemics, workforce expectations, and labor shortages.
Our Board is authorized, without stockholder approval, to cause us to issue additional shares of our common stock and to raise capital through the creation and issuance of preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine.
Our Board is authorized, without stockholder approval, to cause us to issue additional shares of our common stock and to raise capital through the creation and issuance of preferred stock, debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our Board in its sole discretion may determine. 58 Sales of substantial amounts of our capital stock or other securities convertible into our capital stock could cause the valuation of our capital stock to decrease significantly.
In the event that some or all of these federal enforcement and regulations are imposed, we do not know what the impact would be on the cannabis industry, including what costs, requirements and possible prohibitions may be enforced.
Cannabis facilities are currently regulated by state and local governments. In the event that some or all of these federal enforcement and regulations are imposed, we do not know what the impact would be on the cannabis industry, including what costs, requirements and possible prohibitions may be enforced.
These activities could be viewed as creating a conflict of interest insofar as the time and effort of the professional staff of our Manager and its officers and employees will not be devoted exclusively to our business; instead, it will be allocated between our business and the management of these other investment vehicles.
These activities could be viewed as creating a conflict of interest insofar as the time and effort of the professional staff of our Manager and its officers and employees will not be devoted exclusively to our business; instead, it will be allocated between our business and the management of these other investment vehicles, some of which may have conflicting interests with ours.
Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. Our primary interest rate exposures will relate to the financing cost of our debt.
Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our loans. Our primary interest rate exposures relate to the financing cost of our debt. Our financing costs are determined by reference to floating rates.
Currently, we are managed by our Board and our officers and by our Manager, as provided for under our Management Agreement. The initial term of the Management Agreement will expire on May 1, 2024, and will be automatically renewed for one-year terms thereafter unless otherwise terminated.
Currently, we are managed by our Board and our officers and by our Manager, as provided for under our Management Agreement. The Management Agreement will expire on May 1, 2025, and will be automatically renewed for a one-year term thereafter unless otherwise terminated by us or our Manager.
Risks Related to Our Business and Growth Strategy We have limited operating history, and may not be able to operate our business successfully or to generate sufficient revenue to make or sustain distributions to our stockholders. We were formed on March 30, 2021 and have a limited operating history.
Risks Related to Our Business and Growth Strategy We have limited operating history, and may not be able to operate our business successfully or to generate sufficient revenue to make or sustain distributions to our stockholders.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeAs of the date of this report, we are not aware of any material risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations, or financial condition.
Biggest changeMaterial Impact of Risks from Cybersecurity Threats As of the date of this report, we have not experienced a material information security breach incident and the expenses we have incurred from information security breach incidents have been immaterial , and we are not aware of any cybersecurity risks that are reasonably likely to materially affect our business.
Annual briefings of the audit committee by employees of the Manager and/or the IT Consultant may include topics such as risk assessment, risk management and control decisions, service provider arrangements, test results, security incidents and responses, and recommendations for changes and updates to policies and procedures.
Annual briefings of the audit committee by employees of the Manager and/or the IT Consultant may include topics such as risk assessment, risk management and control decisions, service provider arrangements, test results, security incidents and responses, and recommendations for changes and updates to policies and procedures. 60
Governance Our board of directors has responsibility for the direction and oversight of our risk management. Our board of directors administers this oversight function directly, with support from its committees.
Our board of directors has responsibility for the direction and oversight of our risk management. Our board of directors administers this oversight function directly, with support from its committees.
As part of its collective risk management process, our Manager engages a third party information technology consultant (“IT Consultant”) to evaluate risks associated with the Manager’s information and technology system(s), network and physical devices. Our Manager also uses the National Institute of Standards of Technology (NIST) Cybersecurity Framework to assess its cybersecurity controls.
As part of its collective risk management process, our Manager engages a third party information technology consultant (“IT Consultant ”) to evaluate risks associated with the Manager’s information and technology system(s), network and physical devices.
Item 1C. Cybersecurity. As an externally managed company, our business is highly dependent on the communications and information systems of our Manager, its affiliates and third-party service providers. We, in conjunction with our Manager, have adopted processes designed to identify, assess and manage material risks from cybersecurity threats.
Item 1C. Cybersecurity. Assessment, Identification and Management of Material Risks from Cybersecurity Threats As an externally managed company, our business is highly dependent on the communications and information systems of our Manager, its affiliates and third-party service providers.
These processes include responses to and assessments of internal and external threats to the security, confidentiality, integrity and availability of our and our Manager’s data and systems along with other material risks to operations.
Our Manager has implemented and continues to implement procedures to address internal and external threats to the security, confidentiality, integrity and availability of our and our Manager’s data and systems along with other material risks to operations and information of our shareholders and other third parties who entrust us with their sensitive information.
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We, in conjunction with our Manager, have adopted processes designed to identify, assess and manage material risks from cybersecurity threats which prioritizes detection and analysis of and response to known, anticipated, or unexpected threats, effective management of security risks and resilience against cyber incidents.
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The Manager's cybersecurity program is aligned to the National Institute of Standards of Technology (NIST) Cybersecurity Framework. Our Manager's cybersecurity risk management processes include technical security controls, policy enforcement mechanisms, monitoring systems, tools and related services, which include tools and services from third-party providers, and management oversight to assess, identify and manage risk from cybersecurity.
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Our Manager's cybersecurity risk management and awareness programs include periodic identification and testing of vulnerabilities, regular phishing simulations and annual general cybersecurity awareness and data protection training including for employees of our Manager.
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Our Manager also has annual certification requirements for employees, including employees who provide services to us pursuant to our Management Agreement with respect to certain policies supporting the cybersecurity program including Chicago Atlantic's Information Security and Electronic Communications policy, Data Protection Policy and Privacy Policy.
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Our Manager undertakes periodic internal security reviews of our information systems and related controls, including systems affecting personal data and the cybersecurity risks of our Manager and our critical third-party vendors and other partners. Our Manager also completes periodic external reviews of its cybersecurity program and practices, which include assessments of relevant data protection practices and targeted attack simulations.
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However, future incidents could have a material impact on our business strategy, results of operations or financial condition. For additional discussion of the risks posed by cybersecurity threats, see “Item 1A.
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Risk Factors— General Risk Factors—We rely on information technology in our operations, and security breaches and other disruptions in our systems could compromise our information and expose us to liability, which would cause our business and reputation to suffer.” Governance and Oversight of Cybersecurity Risks Our cybersecurity program is managed by IT Manager and our IT consultant , which together, are responsible for enterprise-wide cybersecurity strategy, policies, standards, engineering, architecture and processes.
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The team is led by our Manager's IT Manager who has a bachelo r's degree in Information Systems from Xavier University and over 15 years o f experience advising on and managing risks from cybersecurity threats as well as developing and implementing cybersecurity policies and procedures for financial services companies.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeFurthermore, third-parties may try to seek to impose liability on us in connection with our loans. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Mi ne Safety Disclosures Not applicable. 58 PA RT II
Biggest changeFurthermore, third-parties may try to seek to impose liability on us in connection with our loans. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Mi ne Safety Disclosures Not applicable. 61 PA RT II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThere were 63 holders of record of our common stock as of March 8, 2024. This number does not include beneficial owners who hold shares of our common stock in street name. There were no unregistered sales of equity securities during the year ended December 31, 2023.
Biggest changeThere were 53 holders of record of our common stock as of March 7, 2025. This number does not include beneficial owners who hold shares of our common stock in street name. There were no unregistered sales of equity securities during the years ended December 31, 2024 and 2023.
REIT taxable income as computed for purposes of the foregoing tax rules will not necessarily correspond to our net income as determined for financial reporting purposes, or our Distributable Earnings as described under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Financial Measures and Indicators — Distributable Earnings .” See “ U.S.
REIT taxable income as computed for purposes of the foregoing tax rules will not necessarily correspond to our net income as determined for financial reporting purposes, or our Distributable Earnings as described under “ Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Measures and Key Financial Measures and Indicators — Distributable Earnings .” See “ U.S.
Item 5. Ma rket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed for trading on the Nasdaq Global Market under the symbol “REFI.” On March 8, 2024, the closing price of our common stock, as reported on the Nasdaq Global Market, was $16.18 per share.
Item 5. Ma rket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed for trading on the Nasdaq Global Market under the symbol “REFI.” On March 7, 2025, the closing price of our common stock, as reported on the Nasdaq Global Market, was $16.15 per share.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe table below summarizes our portfolio as of December 31, 2023: 68 Loan (1) Location(s) Initial Funding Date (1) Maturity Date (2) Total Commitment (3) Principal Balance Original Issue Discount Carrying Value Percentage of Our Loan Portfolio Future Fundings Interest Rate (4) Periodic Payment (5) YTM IRR (6) 1 Various 10/27/2022 10/30/2026 $ 30,000,000 $ 29,910,000 $ (635,656 ) $ 29,274,344 8.3 % - P+6.5% Cash (11) I/O 17.3% 2 Michigan 1/13/2022 12/31/2024 35,891,667 38,810,119 (81,073 ) 38,729,046 11.0 % - P+6.65% Cash, 4.25% PIK (17) P&I 18.0% 3 (18) Various 3/25/2021 11/29/2024 20,105,628 20,657,606 (175,697 ) 20,481,909 5.8 % - P+10.38% Cash, 2.75% PIK (7) P&I 23.5% 4 Arizona 4/19/2021 2/14/2023 14,240,129 15,396,370 - 15,396,370 4.4 % - P+11.75% PIK (15) I/O 25.9% 5 Massachusetts 4/19/2021 4/30/2025 3,500,000 3,194,180 - 3,194,180 0.9 % - P+12.25% Cash (7) P&I 22.8% 6 (19) Michigan 8/20/2021 2/20/2024 6,000,000 4,264,421 (535 ) 4,263,886 1.2 % - P+9% Cash (7) P&I 20.8% 7 Illinois, Arizona 8/24/2021 6/30/2025 25,000,000 20,184,005 (128,551 ) 20,055,454 5.7 % - P+6% Cash, 2% PIK (12) P&I 19.5% 8 West Virginia 9/1/2021 9/1/2024 9,500,000 11,706,059 (42,473 ) 11,663,586 3.3 % - P+9.25% Cash, 2% PIK (8) P&I 25.1% 9 (20) Pennsylvania 9/3/2021 6/30/2024 15,000,000 16,402,488 - 16,402,488 4.6 % - P+10.75% Cash, 3% PIK (7) P&I 16.2% 11 Maryland 9/30/2021 9/30/2024 32,000,000 33,310,259 (267,990 ) 33,042,269 9.3 % - P+8.75% Cash, 2% PIK (7) I/O 22.0% 12 Various 11/8/2021 10/31/2024 20,000,000 8,710,222 (52,406 ) 8,657,816 2.4 % - P+7% Cash (13) P&I 19.5% 13 Michigan 11/22/2021 11/1/2024 13,600,000 13,392,094 (59,248 ) 13,332,846 3.8 % - P+6% Cash, 1.5% PIK (12) I/O 19.5% 14 Various 12/27/2021 12/27/2026 5,000,000 5,253,125 - 5,253,125 1.5 % - P+12.25% Cash, 2.5% PIK (9) P&I 22.8% 16 Florida 12/30/2021 12/31/2024 13,000,000 4,437,500 (19,058 ) 4,418,442 1.2 % - P+9.25% Cash (7) I/O 36.3% 17 Florida 1/18/2022 1/31/2025 15,000,000 15,000,000 (136,667 ) 14,863,333 4.2 % - P+4.75% Cash (11) P&I 14.8% 18 Ohio 2/3/2022 2/28/2025 11,662,050 17,155,637 (92,206 ) 17,063,431 4.8 % - P+1.75% Cash, 5% PIK (12) P&I 20.4% 19 Florida 3/11/2022 8/29/2025 20,000,000 20,080,084 (48,217 ) 20,031,867 5.7 % - 11% Cash, 3% PIK P&I 15.5% 20 Missouri 5/9/2022 5/30/2025 17,000,000 17,691,575 (78,532 ) 17,613,043 5.0 % - 11% Cash, 2% PIK P&I 14.7% 21 Illinois 7/1/2022 7/29/2026 9,000,000 5,353,186 (56,877 ) 5,296,309 1.5 % - P+8.5% Cash, 3% PIK (9) P&I 25.6% 23 Arizona 3/27/2023 3/31/2026 2,000,000 1,860,000 (37,319 ) 1,822,681 0.5 % - P+7.5% Cash (14) P&I 19.4% 24 Oregon 3/31/2023 9/27/2026 1,000,000 820,000 - 820,000 0.2 % - P+10.5% Cash (10) P&I 21.7% 25 New York 8/1/2023 6/29/2036 23,309,588 22,611,938 - 22,611,938 6.4 % - 15% Cash P&I 16.7% 26 Connecticut 8/31/2023 2/27/2026 5,450,000 5,450,000 (118,004 ) 5,331,996 1.5 % - 14% Cash P&I 19.1% 27 Nebraska 8/15/2023 6/30/2027 13,061,667 13,061,667 - 13,061,667 3.7 % - P+8.75% Cash P&I 19.0% 28 Ohio 9/13/2023 3/13/2025 2,466,705 2,466,705 - 2,466,705 0.7 % - 15% Cash P&I 17.4% 29 Illinois 10/11/2023 10/9/2026 1,062,564 1,066,065 - 1,066,065 0.3 % - 11.4% Cash, 1.5% PIK P&I 15.9% 30 Missouri, Arizona 12/20/2023 12/31/2026 15,000,000 7,500,000 (74,186 ) 7,425,814 2.1 % 7,500,000 P+7.75% Cash (16) I/O 18.4% Subtotal $ 378,849,998 $ 355,745,305 $ (2,104,695 ) $ 353,640,610 100 % $ 7,500,000 Wtd Average 19.4% (1) All loans originated prior to April 1, 2021 were purchased from affiliated entities at fair value plus accrued interest on or subsequent to April 1, 2021.Loan numbering in the table above is maintained from origination for purposes of comparability and may not be sequential due to maturities, payoffs, or refinancings.
Biggest changeOn an aggregate basis, our total loan portfolio is comprised of 62.1% and 37.9% floating rate loans and fixed rate loans, respectively. 71 As of December 31, 2023 Total Principal Original Issue Discount Carrying Value Percentage of loans held for investment Fixed-rate loans $ 69,366,367 $ (244,753 ) $ 69,121,614 19.5 % Floating-rate loans 286,378,938 (1,859,942 ) 284,518,996 80.5 % Total $ 355,745,305 $ (2,104,695 ) $ 353,640,610 100.0 % The table below summarizes our portfolio as of December 31, 2024: Loan (1) Location(s) Initial Funding Date (1) Maturity Date (2) Principal Balance Original Issue Discount Carrying Value Percentage of Our Loan Portfolio Future Fundings Interest Rate (3) Periodic Payment (4) YTM IRR (5) 1 Various 10/27/2022 10/30/2026 $ 19,324,557 $ (314,110 ) $ 19,010,447 4.7 % - P+6.5% Cash (8) P&I 17.1% 2 Michigan 12/31/2021 12/31/2025 27,110,506 - 27,110,506 6.7 % - P+3% Cash (13)(20) I/O 17.3% 3 Various 11/18/2021 1/29/2027 21,248,176 (523,689 ) 20,724,487 5.1 % - P+10.375% Cash, 2.75% PIK (11)(14)(15) I/O 22.2% 4 Arizona 4/19/2021 6/17/2026 6,626,809 - 6,626,809 1.6 % - 11.91% Cash I/O 17.0% 5 Massachusetts 4/19/2021 4/30/2025 2,564,180 - 2,564,180 0.6 % - P+12.25% Cash (6) P&I 22.6% 6 Michigan 8/20/2021 1/30/2026 4,958,123 - 4,958,123 1.2 % - P+6.5% Cash (13) I/O 17.2% 7 Illinois, Arizona 8/24/2021 6/30/2025 24,293,793 (54,413 ) 24,239,380 6.0 % - P+6% Cash, 2% PIK (9) P&I 19.3% 8 West Virginia 9/1/2021 12/31/2025 8,491,943 - 8,491,943 2.1 % - 10% Cash I/O 15.0% 9 Pennsylvania 9/3/2021 6/30/2024 16,402,488 - 16,402,488 4.1 % - P+20.75% Cash(6)(16) P&I 17.5% 12 Various 11/8/2021 10/31/2027 11,159,358 (35,634 ) 11,123,724 2.8 % - P+7% Cash, 2% PIK (10) I/O 19.3% 16 Florida 12/30/2021 8/29/2025 6,557,500 (25,236 ) 6,532,264 1.6 % - 16.75% Cash I/O 31.2% 18 Ohio 2/3/2022 12/31/2025 45,024,611 (433,918 ) 44,590,693 11.1 % - P+1.75% Cash, 5% PIK (9)(17) I/O 16.1% 19 Florida 3/11/2022 12/31/2025 18,892,211 (23,850 ) 18,868,361 4.7 % - 11% Cash, 5% PIK P&I 16.5% 20 Missouri 5/9/2022 11/28/2025 22,243,402 (65,969 ) 22,177,433 5.5 % - 11% Cash, 2% PIK P&I 14.7% 21 Illinois 7/1/2022 7/29/2026 6,583,891 (34,755 ) 6,549,136 1.6 % - P+7% Cash, 2% PIK (9) P&I 23.3% 23 Arizona 3/27/2023 3/31/2026 1,620,000 (20,682 ) 1,599,318 0.4 % - P+7.5% Cash (12) P&I 18.7% 24 Oregon 9/27/2022 9/27/2026 580,000 - 580,000 0.1 % - P+10.5% Cash (7) P&I 21.7% 25 New York 8/1/2023 6/29/2036 25,093,595 - 25,093,595 6.2 % - 15% Cash P&I 16.6% 27 Nebraska 8/15/2023 6/30/2027 17,400,000 - 17,400,000 4.3 % - P+6.5% Cash (18) I/O 15.7% 28 Ohio 9/13/2023 3/13/2025 2,466,705 - 2,466,705 0.6 % - 15% Cash I/O 17.4% 29 Illinois 10/11/2023 10/9/2026 1,943,217 - 1,943,217 0.5 % - 11.4% Cash, 1.5% PIK P&I 14.7% 30 Missouri, Arizona 12/19/2023 12/31/2026 19,000,000 (139,306 ) 18,860,694 4.7 % - P+7.75% Cash (13) P&I 18.7% 31 California, Illinois 5/3/2023 5/3/2026 6,680,000 - 6,680,000 1.7 % - P+8.75% Cash (10) I/O 18.3% 32 Nevada 4/15/2024 8/15/2027 6,000,000 (27,982 ) 5,972,018 1.5 % - P+6.5% Cash (12) I/O 16.1% 33 Minnesota 5/20/2024 5/28/2027 1,116,000 (4,776 ) 1,111,224 0.3 % - 12% Cash (14) P&I 12.9% 34 Arizona 6/17/2024 5/29/2026 10,000,000 - 10,000,000 2.5 % - 11.91% Cash I/O 12.8% 35 California 8/23/2024 8/23/2027 24,256,045 - 24,256,045 6.0 % - 12% Cash, 3% PIK I/O 16.3% 36 Illinois 10/28/2024 1/1/2027 25,000,000 (114,937 ) 24,885,063 6.2 % 2,000,000 P+6.25% Cash (10) I/O 15.2% 37 Various 11/26/2024 11/24/2028 20,019,444 (390,404 ) 19,629,040 4.9 % 10,000,000 12% Cash, 1% PIK (19) I/O 15.2% 38 Minnesota 12/13/2024 12/13/2025 2,065,000 (34,847 ) 2,030,153 0.5 % 2,935,000 10% Cash (19) I/O 14.7% Total $ 404,721,554 $ (2,244,508 ) $ 402,477,046 100 % $ 14,935,000 Wtd Average 17.2% (1) Loan numbering in the table above is maintained from origination for purposes of comparability and may not be sequential due to maturities, payoffs, or refinancings.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) 71 depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.
We define Distributable Earnings as, for a specified period, the net income (loss) computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; provided that Distributable Earnings does not exclude, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash, (iv) provision for current expected credit losses and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between our Manager and our independent directors and after approval by a majority of such independent directors.
Market Conditions We believe that favorable market conditions, including an imbalance in supply and demand of credit to cannabis operating companies, have provided attractive opportunities for non-bank lenders, such as us, to finance commercial real estate loans and other loans that exhibit strong fundamentals but also require more customized financing structures and loan products than regulated 63 financial institutions can presently provide.
Market Conditions We believe that favorable market conditions, including an imbalance in supply and demand of credit to cannabis operating companies, have provided attractive opportunities for non-bank lenders, such as us, to finance commercial real estate loans and other loans that exhibit strong fundamentals but also require more customized financing structures and loan products than regulated financial institutions can presently provide.
Risk Management To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio of loans.
Risk Management To the extent consistent with maintaining our REIT qualification and our exemption from registration under the Investment Company Act, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, 66 credit, prepayment and convexity (a measure of the sensitivity of the duration of a loan to changes in interest rates) risks associated with holding our portfolio of loans.
The 76 measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments. We evaluate our loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics as explained above.
The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments. We evaluate our loans on a collective (pool) basis by aggregating on the basis of similar risk characteristics as explained above.
The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments.
The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and 65 duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target investments.
Leverage Policies Although we are not required to maintain any particular leverage ratio, we expect to employ prudent amounts of leverage and, when appropriate, to use debt as a means of providing additional funds for the acquisition of loans, to refinance existing debt or for general corporate purposes.
Leverage Policies 77 Although we are not required to maintain any particular leverage ratio, we expect to employ prudent amounts of leverage and, when appropriate, to use debt as a means of providing additional funds for the acquisition of loans, to refinance existing debt or for general corporate purposes.
The following discussion addresses the accounting estimates that we believe apply to us based on the nature of our operations. Our most critical accounting estimates involve a significant level of estimation uncertainty that have had or are reasonably likely to have a material impact on our financial conditions and results of operations.
The following discussion addresses the accounting estimates that we believe apply to us based on the nature of our operations. Our most critical accounting estimates involve a significant level of estimation 78 uncertainty that have had or are reasonably likely to have a material impact on our financial conditions and results of operations.
We caution readers that our methodology for calculating Distributable Earnings and Adjusted Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings and Adjusted Distributable Earnings may not be comparable to similar measures presented by other REITs.
We caution readers that our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings may not be comparable to similar measures presented by other REITs.
If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend 75 distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
If we determine that our estimated current year taxable income (including net capital gain) will be in excess of estimated dividend distributions (including capital gains dividends) for the current year from such income, we accrue excise tax on a portion of the estimated excess taxable income as such taxable income is earned.
Non-GAAP Measures and Key Financial Measures and Indicators As a commercial mortgage real estate investment trust, we believe the key financial measures and indicators for our business are Distributable Earnings, Adjusted Distributable Earnings, book value per share, and dividends declared per share.
Non-GAAP Measures and Key Financial Measures and Indicators As a commercial mortgage real estate investment trust, we believe the key financial measures and indicators for our business are Distributable Earnings, book value per share, and dividends declared per share.
In considering the potential current expected credit loss, the Manager primarily considers significant inputs to our forecasting methods, which include (i) key loan-specific inputs such as the value of the real estate collateral, liens on equity (including the equity in the entity that holds the state-issued license to cultivate, process, distribute, or retail cannabis), presence of personal or corporate guarantees, among other credit enhancements, LTV ratio, ratio type (fixed or floating) and IRR, loan-term, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and our internal loan risk rating and (iii) a macro-economic forecast.
In considering the potential current expected credit loss, the Manager primarily considers significant inputs to the Company’s forecasting methods, which include (i) key loan-specific inputs such as the value of the real estate collateral, liens on equity (including the equity in the entity that holds the state-issued license to cultivate, process, distribute, or retail cannabis), presence of personal or corporate guarantees, among other credit enhancements, LTV ratio, rate type (fixed or floating) and IRR, loan-term, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and the Company’s internal loan risk rating, and (iii) a macro-economic forecast.
As the cannabis industry continues to evolve and to the extent that additional states legalize 72 cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets.
As the cannabis industry continues to evolve and to the extent that additional states legalize cannabis, the demand for capital continues to increase as operators seek to enter and build out new markets.
In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States. As of December 31, 2023, our portfolio is comprised primarily of first mortgages to established multi-state or single-state cannabis operators or property owners.
In addition, we may invest in borrowers that have equity securities that are publicly traded on the Canadian Stock Exchange (“CSE”) in Canada and/or over-the-counter in the United States. As of December 31, 2024, our portfolio is comprised primarily of first mortgages to established multi-state or single-state cannabis operators or property owners.
ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are documented and supported as of December 31, 2023 and 2022.
ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have analyzed our various federal and state filing positions and believe that our income tax filing positions and deductions are documented and supported as of December 31, 2024 and 2023.
We bear all other costs and expenses of our operations and transactions, including (without limitation) fees and expenses relating to: • organizational and offering expenses; • quarterly valuation expenses; • fees payable to third parties relating to, or associated with, making loans and valuing loans (including third-party valuation firms); • fees and expenses associated with investor relations and marketing efforts (including attendance at investment conferences and similar events); • accounting and loan servicing fees from our third-party fund administrator; • audit fees and expenses from our independent registered public accounting firm; • federal and state registration fees; 61 • any exchange listing fees; • federal, state and local taxes; • independent directors’ fees and expenses; • brokerage commissions; • costs of proxy statements, stockholders’ reports and notices; and • costs of preparing government filings, including periodic and current reports with the SEC.
We bear all other costs and expenses of our operations and transactions, including (without limitation) fees and expenses relating to: • organizational and offering expenses; • quarterly valuation expenses; • fees payable to third parties relating to, or associated with, making loans and valuing loans (including third-party valuation firms); • fees and expenses associated with investor relations and marketing efforts (including attendance at investment conferences and similar events); • accounting and loan servicing fees from our third-party fund administrator; • audit and tax compliance fees and expenses from our independent registered public accounting firm; • federal and state registration fees; • any exchange listing fees; • federal, state and local taxes; • independent directors’ fees and expenses; 64 • brokerage commissions; • costs of proxy statements, stockholders’ reports and notices; and • costs of preparing government filings, including periodic and current reports with the SEC.
These loans are generally held for investment and are substantially secured by real estate, equipment, licenses and other assets of the borrowers to the extent permitted by the applicable laws and the regulations governing such borrowers. 60 We generate revenue primarily in the form of interest income on loans.
These loans are generally held for investment and are substantially secured by real estate, equipment, licenses and other assets of the borrowers to the extent permitted by the applicable laws and the regulations governing such borrowers. 63 We generate revenue primarily in the form of interest income on loans.
Income Taxes We are a Maryland corporation that elected to be taxed as a REIT under the Code, commencing with the taxable period ended December 31, 2021. We believe that we have qualified as a REIT and that our method of operation will enable us to continue to qualify as a REIT.
Income Taxes We are a Maryland corporation that elected to be taxed as a REIT under the Code, commencing with the taxable year ended December 31, 2021. We believe that we have qualified as a REIT and that our method of operation will enable us to continue to qualify as a REIT.
Based on a 5-point scale, our loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows: Rating Definition 1 Very low risk 2 Low risk 3 Moderate/average risk 4 High risk/potential for loss: a loan that has a risk of realizing a principal loss 5 Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or an impairment has been recorded The risk ratings are primarily based on historical data and current conditions specific to each portfolio company, as well as consideration of future economic conditions and each borrower’s estimated ability to meet debt service requirements.
Based on a 5-point scale, our loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows: Rating Definition 1 Very low risk 2 Low risk 3 Moderate/average risk 4 High risk/potential for loss: a loan that has a risk of realizing a principal loss 5 Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or an impairment has been recorded The risk ratings are primarily determined based on current and historical performance metrics specific to each portfolio company, as well as consideration of future economic conditions and each borrower’s estimated ability to meet debt service requirements.
Distributable Earnings is one of many factors considered by our Board in authorizing dividends and, while not a direct measure of net taxable income, over time, the measure can be considered a useful indicator of our dividends. Distributable Earnings and Adjusted Distributable Earnings should not be considered as substitutes for GAAP net income.
Distributable Earnings is one of many factors considered by our Board in authorizing dividends and, while not a direct measure of net taxable income, over time, the measure can be considered a useful indicator of our dividends. 74 Distributable Earnings should not be considered as substitutes for GAAP net income.
The significant upward movement in benchmark interest rates during 2022 contributed to a greater change in the probability of default when compared to 2023, and contributed to the decrease in the provision year over year. o Changes in portfolio risk composition resulting from principal paydowns and new fundings also contributed to the decrease, with reserves on new 2023 originations representing a smaller portion of the reserve than loans originated in prior years.
The upward movement in benchmark interest rates during 2023 contributed to a greater change in the probability of default when compared to 2024, and contributed to the decrease in the provision year over year. o Changes in portfolio risk composition resulting from principal paydowns and new fundings also contributed to the decrease, with reserves on new 2024 originations representing a smaller portion of the reserve than loans originated in prior years.
We believe providing Distributable Earnings and Adjusted Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business.
We believe providing Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business.
Excise tax expense, if any, is included in the line item, income tax expense. For the years ended December 31, 2023 and 2022, we did not incur excise tax expense.
Excise tax expense, if any, is included in the line item, income tax expense. For the years ended December 31, 2024 and 2023, we did not incur excise tax expense.
Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/31/2023 4/14/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 6/30/2023 7/14/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/29/2023 10/13/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/29/2023 1/12/2024 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/29/2023 1/12/2024 $ 0.29 $ 0.29 $ - $ 0.29 Total cash dividend $ 2.17 $ 2.17 $ - $ 2.17 Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/31/2022 4/14/2022 $ 0.40 $ 0.40 $ - $ 0.40 Regular cash dividend 6/30/2022 7/15/2022 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/30/2022 10/14/2022 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/30/2022 1/13/2023 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/30/2022 1/13/2023 $ 0.29 $ 0.29 $ - $ 0.29 Total cash dividend $ 2.10 $ 2.10 $ - $ 2.10 Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP which requires the use of estimates and assumptions that involve the exercise of judgment as to future uncertainties.
Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/28/2024 4/15/2024 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 6/28/2024 7/15/2024 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/30/2024 10/15/2024 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/31/2024 1/13/2025 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/31/2024 1/13/2025 $ 0.18 $ 0.18 $ - $ 0.18 Total cash dividend $ 2.06 $ 2.06 - $ 2.06 Record Date Payment Date Common Share Distribution Amount Taxable Ordinary Income Return of Capital Section 199A Dividends Regular cash dividend 3/31/2023 4/14/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 6/30/2023 7/14/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 9/29/2023 10/13/2023 $ 0.47 $ 0.47 $ - $ 0.47 Regular cash dividend 12/29/2023 1/12/2024 $ 0.47 $ 0.47 $ - $ 0.47 Special cash dividend 12/29/2023 1/12/2024 $ 0.29 $ 0.29 $ - $ 0.29 Total cash dividend $ 2.17 $ 2.17 $ - $ 2.17 Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP which requires the use of estimates and assumptions that involve the exercise of judgment as to future uncertainties.
(each a “Sales Agent” and together the “Sales Agents”) under which we may, from time to time, offer and sell shares of common stock, having an aggregate offering price of up to $75.0 million.
Inc. (each a “Sales Agent” and together the “Sales Agents”) under which the Company may, from time to time, offer and sell shares of common stock, having an aggregate offering price of up to $75.0 million.
As of December 31, 2023 and 2022, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 19.4% and 19.7%, respectively, and was substantially secured by real estate and, with respect to certain of our loans, substantially all assets of the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
As of December 31, 2024 and 2023, our loan portfolio had a weighted-average yield-to-maturity internal rate of return (“YTM IRR”) of 17.2% and 19.4%, respectively, and was substantially secured by real estate and, with respect to certain of our loans, substantially all assets of the borrowers and certain of their subsidiaries, including equipment, receivables, and licenses.
As of December 31, 2023, Loan #9 is held on the consolidated balance sheet as a loan held for investment – related party with a carrying value of approximately $16.4 million and a reserve for current expected credit losses of approximately $1.5 million.
As of December 31, 2024, Loan #9 is held on the consolidated balance sheet as a loan held for investment – related party with a carrying value of approximately $16.4 million and a reserve for current expected credit losses of approximately $1.2 million.
The following table summarizes the Company’s dividends declared during the years ended December 31, 2023 and 2022.
The following table summarizes the Company’s dividends declared during the years ended December 31, 2024 and 2023.
Additionally, we must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1. As of December 31, 2023, we were in compliance with all financial covenants with respect to the Revolving Loan.
Additionally, the Company must comply with certain financial covenants including: (1) maximum capital expenditures of $150,000, (2) maintaining a debt service coverage ratio greater than 1.35 to 1, and (3) maintaining a leverage ratio less than 1.50 to 1. As of December 31, 2024, the Company is in compliance with all financial covenants with respect to the Revolving Loan.
As of December 31, 2023 and 2022, 27.1% and 13.6%, respectively, of the loan principal held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a portfolio diversified across jurisdictions and across verticals, including cultivators, processors, dispensaries, as well as ancillary businesses.
As of December 31, 2024 and 2023, 36.5% and 27.1%, respectively, of the loan principal held in our portfolio are backed by personal or corporate guarantees. We aim to maintain a portfolio diversified across jurisdictions and across verticals, including cultivators, processors, dispensaries, as well as ancillary businesses.
As of December 31, 2023 and 2022, approximately 80.5% and 83.1%, respectively, of our portfolio was comprised of floating rate loans, and 19.5% and 16.9% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.
As of December 31, 2024 and 2023, approximately 62.1% and 80.5%, respectively, of our portfolio was comprised of floating rate loans, and 37.9% and 19.5% of our portfolio was comprised of fixed rate loans, respectively. The floating rate loans described above are variable based upon the Prime Rate plus an applicable margin, and in many cases, a Prime Rate floor.
Distributable Earnings and Adjusted Distributable Earnings In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings and Adjusted Distributable Earnings to evaluate our performance. Each of Distributable Earnings and Adjusted Distributable Earnings is a measure that is not prepared in accordance with GAAP.
Distributable Earnings In addition to using certain financial metrics prepared in accordance with GAAP to evaluate our performance, we also use Distributable Earnings to evaluate our performance. Distributable Earnings is a measure that is not prepared in accordance with GAAP.
Under the terms of the Sales Agreement, we have agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock sold through the Sales Agents.
Under the terms of the Sales Agreement, the Company has agreed to pay the Sales Agents a commission of up to 3.0% of the gross proceeds from each sale of common stock sold through the Sales Agents.
Recent Accounting Pronouncements Refer to footnote 2 to our consolidated financial statements for the year ended December 31, 2023, titled “ Significant Accounting Policies ” for information on recent accounting pronouncements. 80
Recent Accounting Pronouncements Refer to footnote 2 to our consolidated financial statements for the year ended December 31, 2024, titled “ Significant Accounting Policies ” for information on recent accounting pronouncements. 82
As of December 31, 2023 approximately 68.9% of our loans carry a risk rating of "1" or 2", an increase when compared to 62.6% as of December 31, 2022. o Additionally, improvement in enterprise valuations of our borrowers, driven by valuation multiples of comparable companies remaining more stable or increasing during the year ended December 31, 2023 as compared to December 31, 2022. • The current expected credit loss reserve represents approximately 140 basis points of our aggregate loan commitments held at carrying value of approximately $5.0 million.
As of December 31, 2024, approximately 71.2% of our loans carry a risk rating of "1" or 2", an increase when compared to 68.9% as of December 31, 2023. o Additionally, improvement in enterprise valuations of our borrowers, driven by valuation multiples of comparable companies remaining more stable or increasing during the year ended December 31, 2024 as compared to December 31, 2023. • The current expected credit loss reserve represents approximately 105 basis points of our aggregate loan commitments held at carrying value of approximately $4.3 million.
We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. Loan Portfolio As of December 31, 2023 and 2022, our portfolio included 27 and 22 loans held for investment of approximately $353.6 million and $339.3 million at carrying value, respectively, prior to the reserve for current expected credit losses.
We continuously evaluate the credit quality of each loan by assessing the risk factors of each loan. Loan Portfolio As of December 31, 2024 and 2023, our portfolio included 30 and 27 loans held for investment of approximately $402.5 million and $353.6 million at carrying value, respectively, prior to the reserve for current expected credit losses.
These estimates may change in future periods based on available future macro-economic data and might result in a material change in our future estimates of expected credit losses for our loan portfolio.
These estimates may change in 79 future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio.
However, our Sponsor has had operations for the past three fiscal years and has made investments in similar loans that have similar characteristics, including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above.
However, the Company’s Sponsor and its affiliates have had operations for the past three fiscal periods and have made investments in similar loans that have similar characteristics including interest rate, collateral coverage, guarantees, and prepayment/make whole provisions, which fall into the pools identified above.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change. Actual results could differ from those estimates and assumptions.
To be conservative, we have not assumed any prepayment penalties or early payoffs in our estimated YTM calculation. Estimated YTM is based on current management estimates and assumptions, which may change.
The Revolving Loan provides for certain affirmative covenants, including requiring us to deliver financial information and any notices of default, and conducting business in the normal course.
The Unsecured Notes provide for certain affirmative covenants, including requiring us to deliver certain financial information and any notices of default, and conducting business in the normal course.
As of December 31, 2023 and 2022, all of our cash was unrestricted and totaled approximately $7.9 million and $5.7 million, respectively.
As of December 31, 2024 and 2023, all of our cash was unrestricted and totaled approximately $26.4 million and $7.9 million, respectively.
Net Cash Used in Investing Activities For the years ended December 31, 2023 and 2022, we reported “Net cash provided used in investing activities” of $1.9 million and $125.2 million, respectively.
Net Cash Used in Investing Activities For the years ended December 31, 2024 and 2023, we reported “Net cash used in investing activities” of $39.3 million and $1.9 million, respectively.
The Prime Rate during the years ended December 31, 2023 and 2022 was as follows: Effective Date Rate (1) July 27, 2023 8.50 % May 4, 2023 8.25 % March 23, 2023 8.00 % February 2, 2023 7.75 % December 15, 2022 7.50 % November 3, 2022 7.00 % September 22, 2022 6.25 % July 28, 2022 5.50 % June 16, 2022 4.75 % May 5, 2022 4.00 % March 17, 2022 3.50 % March 15, 2020 3.25 % (1) Rate obtained from the Wall Street Journal’s “Bonds, Rates & Yields” table.
The Prime Rate during the years ended December 31, 2024 and 2023 was as follows: Effective Date Rate (1) December 19, 2024 7.50 % November 8, 2024 7.75 % September 19, 2024 8.00 % July 27, 2023 8.50 % May 4, 2023 8.25 % March 23, 2023 8.00 % February 2, 2023 7.75 % (1) Rate obtained from the Wall Street Journal’s “Bonds, Rates & Yields” table.
Changes in Market Interest Rates and Effect on Net Interest Income Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.
Changes in Market Interest Rates and Effect on Net Interest Income Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations.
(6) Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features.
P&I loans may include interest only periods for a portion of the loan term. (5) Estimated YTM, calculated on a weighted average principal basis, includes a variety of fees and features that affect the total yield, which may include, but is not limited to, OID, exit fees, prepayment fees, unused fees and contingent features.
Given the similarity of the structuring of the credit agreements for the loans in our portfolio, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor in determining the extent to which we should record a CECL Reserve.
Given the similarity of the structuring of the credit agreements for the loans in the Company’s portfolio to the loans originated by its Sponsor, management considered it appropriate to consider the past repayment history of loans originated by the Sponsor and its affiliates in determining the extent to which a CECL Reserve shall be recorded.
The risk ratings shown in the following table as of December 31, 2023 and 2022 consider borrower specific credit history and performance and quarterly re-evaluation of overall current macroeconomic conditions affecting the borrowers.
The risk ratings shown in the following table as of December 31, 2024 and 2023 consider borrower specific credit history and performance and reflect a quarterly re-evaluation of overall current macroeconomic conditions affecting the Company’s borrowers, specifically those designated as held for investment.
In February 2024, we entered into an amendment to Loan #16, which modified certain financial covenants. No monetary terms of the loan were modified in connection with the amendment. In February 2024, we entered into an amendment to Loan #6, which extended the maturity date to March 20, 2024.
No monetary terms of the loan were modified in connection with the amendment. 67 In February 2024, we entered into an amendment to Loan #6, which extended the maturity date to April 15, 2024. No other terms of the loan were modified in connection with this amendment.
The Prime rate increased 100 basis points in 2023, as compared to 425 basis points in 2022, indicating a more stabilized credit market in 2023 compared to 2022.
The Prime rate decreased 100 basis points in 2024, as compared to an increase of 100 basis points in 2023, indicating a more stabilized credit market in 2024 compared to 2023.
As we acquire new loans and our Manager monitors loan and borrower performance, these estimates will be revised each period. 77 Risk Ratings We assess the risk factors of each loan, and assign a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, enterprise value of the portfolio company, loan structure and exit strategy, and project sponsorship.
Risk Ratings We assess the risk factors of each loan, and assign a risk rating based on a variety of factors, including, without limitation, payment history, real estate collateral coverage, property type, geographic and local market dynamics, financial performance, enterprise value of the portfolio company, loan structure and exit strategy, and project sponsorship. This review is performed quarterly.
Those accounting estimates that we believe are most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.
Those accounting estimates that we believe are most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below. CECL Reserve We record a current expected credit loss reserve ("CECL Reserve") for our loans held for investment.
These changes were offset by the purchase of $3.2 million of debt securities at fair value, an increase in PIK interest of approximately $2.5 million, a decrease in management and incentive fees payable of approximately $2.5 million, a decrease in current expected credit losses of approximately $2.9 million, an increase in stock based compensation of approximately $1.0 million, a decrease in related party net payable of approximately $0.7 million, $0.1 million in unrealized gain relating to the purchase of debt securities at fair value, and $0.1 million in realized gain relating to the purchase of debt securities over the comparable period .
These changes were offset by a change in the interest reserve of approximately $4.0 million, a decrease in PIK interest of approximately $0.3 million, an increase in stock based compensation of approximately $1.6 million, $0.1 million in unrealized gain relating to the purchase of debt securities at fair value, and $0.1 million in realized gain relating to the purchase of debt securities over the comparable period .
We rely primarily on comparable transactions to estimate enterprise value of our portfolio companies and supplement such analysis with a multiple-based approach to enterprise value to revenue multiples of publicly-traded comparable companies obtained from S&P Capital IQ as of the quarter end, to which we apply a private company discount based on our current borrower profile.
The Manager utilizes a third-party valuation appraiser to assist with the Company’s valuation process primarily using comparable transactions to estimate enterprise value of its portfolio companies and supplement such analysis with a multiple-based approach to enterprise value to revenue multiples of publicly-traded comparable companies obtained from Bloomberg and S&P Capital IQ as of December 31, 2024, to which the Manager may apply a private company discount based on the Company’s current borrower profile.
Recent Developments Revolving Loan On February 28, 2024, Chicago Atlantic Lincoln, LLC ("CAL") entered into a Fifth Amended and Restated Loan and Security Agreement (the “Fifth Amendment and Restatement”).
Recent Developments Updates to Our Credit Facilities during Fiscal Year 2024 Revolving Loan On February 28, 2024, CAL entered into a Fifth Amended and Restated Loan and Security Agreement (the “Fifth Amendment and Restatement”).
We will be subject to interest rate risk in connection with our assets and our related financing obligations. 62 Our operating results will depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally will be based on prevailing market interest rates.
Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing. The cost of our borrowings generally are based on prevailing market interest rates.
On February 15, 2023, the Company completed a registered direct offering of 395,779 shares of common stock at a price of $15.16 per share, raising net proceeds of approximately $6.0 million. The Company sold shares of common stock directly, without the use of underwriters or placement agents, to institutional investors registered pursuant to its effective shelf registration statement.
Registered Direct Offering On February 15, 2023, the Company completed a registered direct offering of 395,779 shares of common stock at a price of $15.16 per share, raising net proceeds of approximately $6.0 million.
The largest loan represented approximately 10.9% and 10.9% of the funded principal and approximately 9.7% and 10.2% of the total commitments as of December 31, 2023 and 2022, respectively.
As of December 31, 2024 and 2023, the top three borrowers represented approximately 21.2% and 28.4% of interest income, respectively. The largest loan represented approximately 11.1% and 10.9% of the funded principal and approximately 9.9% and 9.7% of the total commitments as of December 31, 2024 and 2023, respectively.
For the year ended December 31, 2022, cash outflows primarily related to $149.6 million used for the origination and funding of loans held for investment, partially offset by $6.7 million of cash received from the sales of loans and $17.7 million of cash received from the principal repayment of loans held for investment.
For the year ended December 31, 2024, cash outflows primarily related to $160.8 million used for the origination and funding of loans held for investment and loans at fair value, partially offset by $19.0 million of cash received from the sale of loans and $102.5 million of cash received from the principal repayment of loans held for investment.
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2023 and 2022, respectively: For the year ended December 31, 2023 2022 Net income $ 38,710,248 $ 32,292,477 Adjustments to reconcile net income to net cash used in operating activities and changes in operating assets and liabilities (10,293,789 ) (15,287,322 ) Net cash provided by operating activities 28,416,459 17,005,155 Net cash used in investing activities (1,925,416 ) (125,244,044 ) Net cash (used in)/provided by financing activities (24,308,830 ) 33,706,190 Change in cash and cash equivalents 2,182,213 (74,532,699 ) Net Cash Provided by Operating Activities For the years ended December 31, 2023 and 2022, we reported “Net cash provided by operating activities” of approximately $28.4 million and $17.0 million, respectively.
Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2024 and 2023, respectively: For the year ended December 31, 2024 2023 Net income $ 37,045,403 $ 38,710,248 Adjustments to reconcile net income to net cash used in operating activities and changes in operating assets and liabilities (13,886,027 ) (10,293,789 ) Net cash provided by operating activities 23,159,376 28,416,459 Net cash used in investing activities (39,296,863 ) (1,925,416 ) Net cash provided by/(used in) financing activities 34,639,895 (24,308,830 ) Change in cash and cash equivalents 18,502,408 2,182,213 Net Cash Provided by Operating Activities For the years ended December 31, 2024 and 2023, we reported “Net cash provided by operating activities” of approximately $23.2 million and $28.4 million, respectively.
Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers.
Certain of our loans have extension fees, which are not included in our YTM IRR calculations, but may increase YTM IRR if such extension options are exercised by borrowers. The below table summarizes our portfolio of loans held for investment by rate type as of December 31, 2024 and 2023.
Our loan portfolio as of December 31, 2023 and 2022 was concentrated with the top three borrowers representing approximately 28.7% and 29.4% of the funded principal and approximately 26.4% and 27.9% of the total commitments to borrowers, respectively. As of December 31, 2023 and 2022, the top three borrowers represented approximately 28.4% and 29.3% of interest income, respectively.
Our portfolio of loans held for investment as of December 31, 2024 and 2023 was concentrated with the top three borrowers representing approximately 24.0% and 28.7% of the funded principal and approximately 21.6% and 26.4% of the total commitments to borrowers, respectively.
The following table provides a reconciliation of GAAP net income to Distributable Earnings and Adjusted Distributable Earnings (in thousands, except per share data): For the year ended For the year ended December 31, 2023 December 31, 2022 Net Income $ 38,710,248 $ 32,292,477 Adjustments to net income Stock based compensation 1,479,736 435,623 Amortization of debt issuance costs 550,906 563,464 Provision for current expected credit losses 940,385 3,887,405 Change in unrealized gain on debt securities, at fair value (75,604 ) - Realized gain on debt securities, at fair value (104,789 ) - Distributable Earnings $ 41,500,882 $ 37,178,969 Adjustments to Distributable Earnings - - Adjusted Distributable Earnings $ 41,500,882 $ 37,178,969 Basic weighted average shares of common stock outstanding (in shares) 18,085,088 17,653,765 Adjusted Distributable Earnings per Weighted Average Share $ 2.30 $ 2.11 Diluted weighted average shares of common stock outstanding (in shares) 18,343,725 17,746,214 Adjusted Distributable Earnings per Weighted Average Share $ 2.26 $ 2.10 Book Value Per Share The book value per share of our common stock as of December 31, 2023 and 2022 was approximately $14.94 and $14.86, respectively.
The following table provides a reconciliation of GAAP net income to Distributable Earnings (in thousands, except per share data): Year ended Year ended December 31, 2024 December 31, 2023 Net Income $ 37,045,403 $ 38,710,248 Adjustments to net income Stock based compensation 3,058,674 1,479,736 Amortization of debt issuance costs 256,998 550,906 (Benefit) provision for current expected credit losses (583,298 ) 940,385 Change in unrealized loss (gain) on investments 240,604 (75,604 ) Distributable Earnings $ 40,018,381 $ 41,605,671 Basic weighted average shares of common stock outstanding (in shares) 19,279,501 18,085,088 Basic Distributable Earnings per Weighted Average Share $ 2.08 $ 2.30 Diluted weighted average shares of common stock outstanding (in shares) 19,713,916 18,343,725 Diluted Distributable Earnings per Weighted Average Share $ 2.03 $ 2.27 Book Value Per Share The book value per share of our common stock as of December 31, 2024 and 2023 was approximately $14.83 and $14.94, respectively.
As of December 31, 2023 and December 31, 2022, our borrowers have operations in the jurisdictions in the table below: As of December 31, 2023 As of December 31, 2022 Jurisdiction Outstanding Principal (1) Our Loan Portfolio Jurisdiction Outstanding Principal (1) Our Loan Portfolio Michigan $ 56,466,635 16 % Michigan $ 58,823,506 17 % Maryland 53,907,352 15 % Maryland 53,394,180 16 % Florida 48,815,066 14 % Florida 51,421,128 15 % Ohio 27,902,362 8 % Ohio 45,116,990 13 % Illinois 25,599,133 7 % Illinois 30,302,490 9 % Missouri 25,191,575 7 % Missouri 17,337,220 5 % Arizona 24,466,609 7 % Arizona 19,266,104 6 % New York 22,611,938 6 % New York — 0 % Pennsylvania 21,674,160 6 % Pennsylvania 34,606,585 10 % Nebraska 13,061,667 4 % Nebraska — 0 % Massachusetts 12,308,310 3 % Massachusetts 15,031,751 4 % West Virginia 11,706,059 3 % West Virginia 11,640,004 3 % Nevada 5,764,439 2 % Nevada 6,089,376 2 % Connecticut 5,450,000 2 % Connecticut — 0 % Oregon 820,000 0 % Oregon — 0 % Total $ 355,745,305 100 % Total $ 343,029,334 100 % (1) The principal balance of the loans not secured by real estate collateral are included in the jurisdiction representing the principal place of business.
As of December 31, 2024 and 2023, our borrowers have operations in the jurisdictions in the table below: 81 As of December 31, 2024 As of December 31, 2023 Jurisdiction Outstanding Principal (1) Percentage of Our Loan Portfolio Jurisdiction Outstanding Principal (1) Percentage of Our Loan Portfolio Ohio $ 60,065,707 15 % Ohio $ 27,902,362 8 % Illinois 55,958,079 14 % Illinois 25,599,133 7 % Florida 42,712,285 11 % Florida 48,815,066 14 % Missouri 38,208,259 9 % Missouri 25,191,575 7 % Pennsylvania 35,727,045 9 % Pennsylvania 21,674,160 6 % Michigan 32,068,629 8 % Michigan 56,466,635 16 % Arizona 28,023,340 7 % Arizona 24,466,609 7 % California 26,057,479 6 % California — - % New York 25,093,595 6 % New York 22,611,938 6 % Maryland 21,835,901 5 % Maryland 53,907,352 15 % Nebraska 17,400,000 4 % Nebraska 13,061,667 4 % West Virginia 8,491,943 2 % West Virginia 11,706,059 3 % Nevada 6,000,000 1 % Nevada 5,764,439 2 % Texas 2,756,870 1 % Texas — - % Massachusetts 2,626,423 1 % Massachusetts 12,308,310 3 % Minnesota 1,116,000 0 % Minnesota — - % Oregon 580,000 0 % Oregon 820,000 0 % Connecticut — - % Connecticut 5,450,000 2 % Total $ 404,721,554 100 % Total $ 355,745,305 100 % (1) The principal balance of the loans not secured by real estate collateral are included in the jurisdiction representing the principal place of business.
The terms and conditions of each modification vary based on individual circumstances and will be determined on a case by case basis. Our Manager monitors and evaluates each of our loans held for investment and has maintained regular communications with borrowers regarding potential impacts on our loans.
Our Manager monitors and evaluates each of our loans held for investment and has maintained regular communications with borrowers regarding potential impacts on our loans.
Credit risk will also be addressed through our Manager’s on-going review, and loans will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a quarterly basis. 78 Our Manager or affiliates of our Manager have originated all of our loans and intend to continue to originate our loans, but we may in the future also acquire loans from time to time.
Credit risk will also be addressed through our Manager’s on-going review, and loans will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a quarterly basis.
For the year ended December 31, 2023, we had net borrowings of $8.0 million against the Revolving Loan. As of December 31, 2023, we had $34.0 million available and $66.0 million outstanding under the Revolving Loan (Note 6).
For the year ended December 31, 2024, we had net repayments of $11.0 million against the Revolving Loan. As of December 31, 2024, we had $55.0 million available and $55.0 million outstanding under the Revolving Loan. Refer to Note 8 of the consolidated financial statements for additional information.
The Agent intends to sell the assets in satisfaction of the loan for the benefit of the lenders. As described in Note 3, Loan #9 remains on non-accrual status and we will continue to cease further recognition of income until such events of default are cured or obligations are repaid.
The fair value price which was equal to the proceeds received was approved by the audit committee of the Board. As described in Note 3, Loan #9 remains on non-accrual status and the Company will continue to cease further recognition of income until such events of default are cured or obligations are repaid.
Additionally, we recognized approximately $3.5 million of interest income from prepayment fees and acceleration of original issue discounts and other upfront fees during the year ended December 31, 2023, as compared to $1.2 million for the year ended December 31, 2022. • Interest expense increased as a result of the series of Prime Rate increases discussed above as well as timing of borrowings and amounts outstanding under the Revolving Loan.
Additionally, we recognized approximately $3.2 million of interest income from prepayment fees and acceleration of original issue discounts and other upfront fees during the year ended December 31, 2024, as compared to $3.5 million for the year ended December 31, 2023, contributing to $0.3 million of the decline.
These increases were partially offset by fewer Outside Fees applied during the year ended December 31, 2023 of approximately $0.2 million, compared to approximately $1.3 million for the year ended December 31, 2022. • The increase in general and administrative expenses and professional fees was primarily due to an increase in overhead reimbursements for costs incurred by the Manager of $4.8 million for the year ended December 31, 2023 compared to $3.1 million for the same period in 2022. • Stock based compensation increased as a result of the grant of 323,452 restricted stock awards to employees of our Manager during the year ended December 31, 2023, for which expense is recognized ratably over the vesting period. • During 2023, the Company recognized approximately $0.2 million of realized and unrealized gains on corporate bonds, held at fair value, which were not held by the Company as of or during the year ended December 31, 2022. 67 • Our provision for current expected credit losses decreased due to both borrower specific credit factors, and regular re-evaluations of overall current macroeconomic conditions affecting our borrowers and the industry. o As of December 31, 2023 and 2022, greater than 80% of the portfolio bears a floating rate based on the Prime Rate.
Stock based compensation expense is recognized ratably over the vesting period. • During the year ended December 31, 2024, the Company recognized a change in unrealized (loss) gain on investments of approximately $0.2 million, which was driven primarily by $0.2 million of unrealized losses on the Company's loan held at fair value of $5.3 million as of December 31, 2024. • Our provision for current expected credit losses decreased due to both borrower specific credit factors, and regular re-evaluations of overall current macroeconomic conditions affecting our borrowers and the industry. o As of December 31, 2024 and 2023, greater than 60% of the portfolio bears a floating rate based on the Prime Rate.
To estimate the historic loan losses relevant to our portfolio, we evaluate our historical loan performance, which includes zero realized loan losses since our inception of operations. Additionally, we analyzed our repayment history, noting we have limited “true” operating history, since the incorporation date of March 30, 2021.
To estimate the historic loan losses relevant to the Company’s portfolio, the Company evaluates its historical loan performance, which includes zero realized loan losses since the inception of its operations. Additionally, the Company analyzed its repayment history, noting it has limited portfolio turnover from the date of our initial public offering.
In addition, we own approximately $0.8 million, at fair value, of publicly-traded corporate bonds issued by a cannabis operator. We consider cannabis operators to be established if they are state-licensed and are deemed to be operational and in good standing by the applicable state regulator.
We consider cannabis operators to be established if they are state-licensed and are deemed to be operational and in good standing by the applicable state regulator.
(2) Weighted average remaining life is calculated based on the carrying value of the loans as of December 31, 2023 and 2022, respectively. 70 The following tables present changes in loans held for investment at carrying value as of and for the years ended December 31, 2023 and 2022: Principal Original Issue Discount Current Expected Credit Loss Reserve Carrying Value (1) Balance at December 31, 2022 $ 343,029,334 $ (3,755,796 ) $ (3,940,939 ) $ 335,332,599 New fundings 93,533,516 (1,332,340 ) - 92,201,176 Principal repayment of loans (76,876,048 ) - - (76,876,048 ) Accretion of original issue discount - 2,983,441 - 2,983,441 Sale of loan (2) (13,399,712 ) - - (13,399,712 ) PIK Interest 9,458,215 - - 9,458,215 Current expected credit loss reserve - - (1,031,708 ) (1,031,708 ) Balance at December 31, 2023 $ 355,745,305 $ (2,104,695 ) $ (4,972,647 ) $ 348,667,963 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted original issue discount, deferred loan fees and other upfront fees.
The following tables summarize our loans held for investment as of December 31, 2024 and 2023: As of December 31, 2024 Outstanding Principal Original Issue Discount Carrying Value Weighted Average Remaining Life (Years) (1) Senior Term Loans $ 404,721,554 $ (2,244,508 ) $ 402,477,046 2.2 Current expected credit loss reserve - - (4,346,869 ) Total loans held at carrying value, net $ 404,721,554 $ (2,244,508 ) $ 398,130,177 As of December 31, 2023 Outstanding Principal Original Issue Discount Carrying Value Weighted Average Remaining Life (Years) (1) Senior Term Loans $ 355,745,305 $ (2,104,695 ) $ 353,640,610 2.1 Current expected credit loss reserve - - (4,972,647 ) Total loans held at carrying value, net $ 355,745,305 $ (2,104,695 ) $ 348,667,963 (1) Weighted average remaining life is calculated on the carrying value of the loans as of December 31, 2024 and 2023, respectively. 73 The following tables present changes in loans held for investment at carrying value as of and for the years ended December 31, 2024 and 2023: Principal Original Issue Discount Current Expected Credit Loss Reserve Carrying Value Balance at December 31, 2023 $ 355,745,305 $ (2,104,695 ) $ (4,972,647 ) $ 348,667,963 New fundings 161,289,523 (1,836,952 ) - 159,452,571 Principal repayment of loans (102,461,111 ) - - (102,461,111 ) Accretion of original issue discount - 1,697,139 - 1,697,139 Transfer of loan held for investment to loan held for sale (19,000,000 ) 213,913 (18,786,087 ) PIK Interest 9,147,837 - - 9,147,837 Decrease in provision for current expected credit losses - - 411,865 411,865 Balance at December 31, 2024 $ 404,721,554 $ (2,244,508 ) $ (4,346,869 ) $ 398,130,177 Principal Original Issue Discount Current Expected Credit Loss Reserve Carrying Value Balance at December 31, 2022 $ 343,029,334 $ (3,755,796 ) $ (3,940,939 ) $ 335,332,599 New fundings 93,533,516 (1,332,340 ) - 92,201,176 Principal repayment of loans (76,876,048 ) - - (76,876,048 ) Accretion of original issue discount - 2,983,441 - 2,983,441 Transfer of loan held for investment to loan held for sale (13,399,712 ) - - (13,399,712 ) PIK Interest 9,458,215 - - 9,458,215 Increase in provision for current expected credit losses - - (1,031,708 ) (1,031,708 ) Balance at December 31, 2023 $ 355,745,305 $ (2,104,695 ) $ (4,972,647 ) $ 348,667,963 We may make modifications to loans, including loans that are in default.
(4) "P" = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; "PIK" = paid-in-kind interest; subtotal represents weighted average interest rate. (5) P&I = principal and interest. I/O = interest only. P&I loans may include interest only periods for a portion of the loan term.
The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications. (3) "P" = prime rate and depicts floating rate loans that pay interest at the prime rate plus a specific percentage; "PIK" = paid-in-kind interest. (4) P&I = principal and interest. I/O = interest only.
Capital Markets We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans.
As of December 31, 2024, the Company is in compliance with all financial covenants with respect to the Unsecured Notes. Capital Markets We may seek to raise further equity capital and issue debt securities in order to fund our future investments in loans.
On May 12, 2022, CAL entered into a second amended and restated Revolving Loan agreement (the “Second Amendment and Restatement”). The Second Amendment and Restatement increased the loan commitment from $45,000,000 to $65,000,000. No other material terms of the Revolving Loan were modified as a result of the execution of the Second Amendment and Restatement.
No other material terms were modified as a result of the execution of this amendment. On September 30, 2024, CAL entered into the Sixth Amended and Restated Loan and Security Agreement (the "Sixth Amendment"). The Sixth Amendment increased the current loan commitment from $105.0 million to $110.0 million.
Net Cash (Used in)/Provided by Financing Activities For the years ended December 31, 2023 and 2022, we reported “Net cash (used in)/provided by financing activities” of $(24.3) million and $33.7 million, respectively.
Net Cash Provided/(Used in) by Financing Activities For the years ended December 31, 2024 and 2023, we reported “Net cash provided by/(used in) financing activities” of $34.6 million and $(24.3) million, respectively. For the year ended December 31, 2024, cash inflows of approximately $39.6 million related to proceeds received from sales of our common stock through the ATM offering.
(2) Loan #6 and Loan #9 placed on non-accrual status and are included in risk rating category "3" and “4”, respectively. Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
In March 2023, we completed the sale of a secured loan to an affiliate under common control. The selling price of approximately $13.7 million was approved by the Audit Committee of the Board and the fair value approximated the carrying value of the loan plus accrued and unpaid interest through March 31, 2023.
The total selling price of approximately $6.0 million was approved by the audit committee of the Board. The fair value approximated the carrying value of the loan of $6.0 million plus accrued unpaid interest through the sale date.
In addition, we review each loan on a quarterly basis and evaluate the borrower’s ability to pay the monthly interest and principal, if required, as well as the loan-to-value (LTV) ratio.
In addition, the Company reviews each loan on a quarterly basis and evaluates the borrower’s ability to pay the monthly interest and principal, if required, as well as the loan-to-value (LTV) ratio. When evaluating qualitative factors that may indicate the need for a CECL Reserve, the Company forecasts losses considering a variety of factors.
Refer to footnote 3 to our consolidated financial statements for the year ended December 31, 2023 titled “ Loans Held for Investment, net ” for more information on CECL. Income Taxes We are a Maryland corporation that elected to be taxed as a REIT under the Code, commencing with our taxable period ended December 31, 2021.
Refer to footnote 3 to our consolidated financial statements for the year ended December 31, 2024 titled “ Loans Held for Investment, net ” for more information on CECL.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeOur portfolio on average had real estate collateral coverage of 1.5x as of December 31, 2023, and all of our loans are secured by equity pledges of the borrower and all asset liens. As of December 31, 2022, 89% of our portfolio was fully secured by real estate and 11% had limited or no real estate collateral.
Biggest changeOur portfolio on average had real estate collateral coverage of 1.1x as of December 31, 2024, and all of our loans are secured by equity pledges of the borrower and all asset liens.
Market Conditions We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise 81 maintain their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans.
Market Conditions We provide loans to established companies operating in the cannabis industry which involves significant risks, including the risk of strict enforcement against our borrowers of the federal illegality of cannabis, our borrowers’ inability to renew or otherwise maintain 83 their licenses or other requisite authorizations for their cannabis operations, and such loans lack of liquidity, and we could lose all or part of any of our loans.
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. 82
In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loan or loans, as the case may be, which could also cause us to suffer losses. 84
We estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual cash interest income, excluding the effects of PIK interest, of approximately $2.9 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest income of approximately $2.9 million.
We estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual cash interest income, excluding the effects of PIK interest, of approximately $2.6 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest income of approximately $0.9 million.
Our portfolio on average had real estate collateral coverage of 1.7x as of December 31, 2022, and all of our loans were secured by equity pledges of the borrower and all asset liens. Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
Our portfolio on average had real estate collateral coverage of 1.5x as of December 31, 2023, and all of our loans were secured by equity pledges of the borrower and all asset liens. Credit Risk We are subject to varying degrees of credit risk in connection with our loans and interest receivable.
Changes in market rates may change the fair value of our Revolving Loan as our loan bears interest at the greater of (1) the Prime Rate plus the applicable margin and (2) 3.25%. As of December 31, 2023, we had an outstanding balance of $66.0 million under the Revolving Loan.
Changes in market rates may change the fair value of our Revolving Loan as our loan bears interest at the greater of (1) the Prime Rate plus the applicable margin and (2) 3.25%. As of December 31, 2024, we had an outstanding balance of $55.0 million under the Revolving Loan.
Based on our outstanding balance as of December 31, 2023, we estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual cash interest expense, excluding unused fees, of approximately $0.7 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest expense of approximately $0.7 million.
Based on our outstanding balance as of December 31, 2024, we estimate that a hypothetical 100 basis points increase in the Prime Rate would result in an increase in annual cash interest expense, excluding unused fees, of approximately $0.6 million and a 100 basis points decrease in the Prime Rate would result in a decrease in annual interest expense of approximately $0.6 million.
As of December 31, 2023, we had 21 floating-rate loans, representing approximately 80.5% of our loan portfolio based on aggregate outstanding principal balances.
As of December 31, 2024, we had 17 floating-rate loans, representing approximately 62.1% of our loan portfolio based on aggregate outstanding principal balances.
Added
As of December 31, 2024, 50.0% of our portfolio is fully secured by real estate, 46.7% is partially secured by real estate, and 3.3% has no real estate collateral .

Other REFI 10-K year-over-year comparisons